Merchants Bancorp 10Q 2023 Q2 Quarterly report

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	June 30, 2023


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

For the transition period from ____________ to _______________

Commission File No. 001-38258


	MERCHANTS BANCORP
	(Exact name of registrant as specified in its charter)


Indiana		20-5747400
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

410 Monon Blvd. Carmel, Indiana		46032
(Address of principal		(Zip Code)
executive office)

(317) 569-7420

(Registrant’s telephone number, including area code)

N/A

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

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

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

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



Large accelerated filer ☐	Accelerated filer ☒	Non-accelerated filer ☐	Smaller reporting company ☐
			Emerging growth company ☐

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

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, without par value	MBIN	NASDAQ
Series A Preferred Stock, without par value	MBINP	NASDAQ
Depositary Shares, each representing a 1/40^th interest in a share of Series B Preferred Stock, without par value	MBINO	NASDAQ
Depositary Shares, each representing a 1/40^th interest in a share of Series C Preferred Stock, without par value	MBINN	NASDAQ
Depositary Shares, each representing a 1/40^th interest in a share of Series D Preferred Stock, without par value	MBINM	NASDAQ

As of July 31, 2023, the latest practicable date, 43,237,300 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 June 30, 2023 and December 31, 2022	3

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2023 and 2022	4

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022	5

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022	6

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022	7

Notes to Condensed Consolidated Financial Statements	8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3 Quantitative and Qualitative Disclosures About Market Risk	68

Item 4 Controls and Procedures	69

PART II – OTHER INFORMATION	70

Item 1 Legal Proceedings	70

Item 1A Risk Factors	70

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3 Defaults Upon Senior Securities	70

Item 4 Mine Safety Disclosures	70

Item 5 Other Information	70

Item 6 Exhibits	71

SIGNATURES	72

Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Merchants Bancorp

Condensed Consolidated Balance Sheets

June 30, 2023 (Unaudited) and December 31, 2022

(In thousands, except share data)


	June 30,		December 31,
	2023		2022
Assets
Cash and due from banks	$	15,390	$	22,170
Interest-earning demand accounts		361,920		203,994
Cash and cash equivalents		377,310		226,164
Securities purchased under agreements to resell		3,412		3,464
Mortgage loans in process of securitization		298,907		154,194
Securities available for sale		648,003		323,337
Securities held to maturity (includes $1,058,590 and $1,118,966 at fair value, respectively)		1,062,017		1,119,078
Federal Home Loan Bank (FHLB) stock		39,130		39,130
Loans held for sale (includes $82,931 and $82,192 at fair value, respectively)		3,058,013		2,910,576
Loans receivable, net of allowance for credit losses on loans of $62,986 and $44,014, respectively		9,854,018		7,426,858
Premises and equipment, net		36,947		35,438
Servicing rights		147,288		146,248
Interest receivable		70,509		56,262
Goodwill		15,845		15,845
Intangible assets, net		949		1,186
Other assets and receivables		262,524		157,447
Total assets	$	15,874,872	$	12,615,227
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing	$	349,387	$	326,875
Interest-bearing		12,710,477		9,744,470
Total deposits		13,059,864		10,071,345
Borrowings		1,016,836		930,392
Deferred and current tax liabilities, net		16,084		19,613
Other liabilities		221,788		134,138
Total liabilities		14,314,572		11,155,488
Commitments and Contingencies
Shareholders' Equity
Common stock, without par value
Authorized - 75,000,000 shares
Issued and outstanding - 43,237,300 shares at June 30, 2023 and 43,113,127 shares at December 31, 2022		138,853		137,781
Preferred stock, without par value - 5,000,000 total shares authorized
7% Series A Preferred stock - $25 per share liquidation preference
Authorized - 3,500,000 shares
Issued and outstanding - 2,081,800 shares		50,221		50,221
6% Series B Preferred stock - $1,000 per share liquidation preference
Authorized - 125,000 shares
Issued and outstanding - 125,000 shares (equivalent to 5,000,000 depositary shares)		120,844		120,844
6% Series C Preferred stock - $1,000 per share liquidation preference
Authorized - 200,000 shares
Issued and outstanding - 196,181 shares (equivalent to 7,847,233 depositary shares)		191,084		191,084
8.25% Series D Preferred stock - $1,000 per share liquidation preference
Authorized - 300,000 shares
Issued and outstanding - 142,500 shares (equivalent to 5,700,000 depositary shares)		137,459		137,459
Retained earnings		928,875		832,871
Accumulated other comprehensive loss		(7,036)		(10,521)
Total shareholders' equity		1,560,300		1,459,739
Total liabilities and shareholders' equity	$	15,874,872	$	12,615,227

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statements of Income (Unaudited)

For the Three and Six Months Ended June 30, 2023 and 2022

(In thousands, except share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Interest Income
Loans	$	228,732	$	85,994	$	418,182	$	158,190
Mortgage loans in process of securitization		3,127		1,449		4,775		3,694
Investment securities:
Available for sale - taxable		5,564		917		7,830		1,618
Held to maturity		17,311		—		33,065		—
Federal Home Loan Bank stock		471		284		898		553
Other		2,864		626		4,613		1,227
Total interest income		258,069		89,270		469,363		165,282
Interest Expense
Deposits		137,801		14,768		242,243		23,581
Borrowed funds		14,651		2,471		20,810		3,945
Total interest expense		152,452		17,239		263,053		27,526
Net Interest Income		105,617		72,031		206,310		137,756
Provision for credit losses		22,603		6,212		29,470		8,663
Net Interest Income After Provision for Credit Losses		83,014		65,819		176,840		129,093
Noninterest Income
Gain on sale of loans		11,350		21,564		18,083		39,529
Loan servicing fees, net		8,616		9,607		10,976		19,338
Mortgage warehouse fees		2,865		1,350		3,893		3,208
Syndication and asset management fees		3,896		1,599		5,108		2,213
Other income		3,155		5,051		6,086		9,480
Total noninterest income		29,882		39,171		44,146		73,768
Noninterest Expense
Salaries and employee benefits		25,724		22,475		47,870		43,768
Loan expenses		907		1,184		1,711		2,395
Occupancy and equipment		2,456		2,011		4,688		3,825
Professional fees		3,723		1,594		5,992		2,897
Deposit insurance expense		3,806		670		5,984		1,429
Technology expense		1,571		1,304		3,148		2,540
Other expense		6,133		3,719		9,699		7,136
Total noninterest expense		44,320		32,957		79,092		63,990
Income Before Income Taxes		68,576		72,033		141,894		138,871
Provision for income taxes		3,274		18,098		21,637		34,794
Net Income	$	65,302	$	53,935	$	120,257	$	104,077
Dividends on preferred stock		(8,668)		(5,729)		(17,335)		(11,457)
Net Income Allocated to Common Shareholders		56,634		48,206		102,922		92,620
Basic Earnings Per Share	$	1.31	$	1.12	$	2.38	$	2.14
Diluted Earnings Per Share	$	1.31	$	1.11	$	2.38	$	2.14
Weighted-Average Shares Outstanding
Basic		43,235,398		43,209,824		43,207,655		43,220,198
Diluted		43,309,393		43,335,211		43,300,240		43,367,875

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three and Six Months Ended June 30, 2023 and 2022

(In thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net Income	$	65,302	$	53,935	$	120,257	$	104,077
Other Comprehensive Income (Loss):
Net change in unrealized gain/(losses) on investment securities available for sale, net of tax (expense)/benefits of $(402), $553, $(1,336) and $2,203, respectively		693		(1,766)		3,485		(6,616)
Other comprehensive income (loss) for the period		693		(1,766)		3,485		(6,616)
Comprehensive Income	$	65,995	$	52,169	$	123,742	$	97,461

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Three and Six Months Ended June 30, 2023 and 2022

(In thousands, except share data)


						��
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
	Shares		Amount	Shares		Amount	Shares		Amount	Shares		Amount
Common Stock
Balance beginning of period	43,233,618	$	138,105	43,267,776	$	137,882	43,113,127	$	137,781	43,180,079	$	137,565
Repurchase of common stock	-		-	(165,037)		(1,761)	-		-	(165,037)		(1,761)
Cash paid in lieu of fractional shares for stock split	-		-	-		-	-		-	(29)		(1)
Distribution to employee stock ownership plan	-		-	-		-	33,293		810	20,709		653
Shares issued for stock compensation plans, net of taxes withheld to satisfy tax obligations	3,682		748	3,766		550	90,880		262	70,783		215
Balance end of period	43,237,300		138,853	43,106,505		136,671	43,237,300		138,853	43,106,505		136,671

7% Series A Preferred Stock
Balance at beginning and end of period	2,081,800		50,221	2,081,800		50,221	2,081,800		50,221	2,081,800		50,221

6% Series B Preferred Stock
Balance at beginning and end of period	125,000		120,844	125,000		120,844	125,000		120,844	125,000		120,844

6% Series C Preferred Stock
Balance at beginning and end of period	196,181		191,084	196,181		191,084	196,181		191,084	196,181		191,084

8.25% Series D Preferred Stock
Balance at beginning and end of period	142,500		137,459	-		-	142,500		137,459	-		-

Retained Earnings
Balance beginning of period			875,700			694,776			832,871			657,149
Net income			65,302			53,935			120,257			104,077
Impact from adoption of ASU 2016-13 (Credit Losses)			-			-			-			(3,648)
Impact from adoption of ASU 2016-02 (Leases)			-			-			-			(110)
Dividends on 7% Series A preferred stock, $1.75 per share, annually			(911)			(911)			(1,821)			(1,821)
Dividends on 6% Series B preferred stock, $60.00 per share, annually			(1,875)			(1,875)			(3,750)			(3,750)
Dividends on 6% Series C preferred stock, $60.00 per share, annually			(2,943)			(2,943)			(5,886)			(5,886)
Dividends on 8.25% Series D preferred stock, $82.50 per share, annually			(2,939)			-			(5,878)			-
Dividends on common stock, $0.32 per share, annually in 2023 and $0.28 per share, annually in 2022			(3,459)			(3,019)			(6,918)			(6,048)
Repurchase of common stock			-			(2,174)			-			(2,174)
Balance end of period			928,875			737,789			928,875			737,789

Accumulated Other Comprehensive Loss
Balance beginning of period			(7,729)			(6,304)			(10,521)			(1,454)
Other comprehensive income (loss)			693			(1,766)			3,485			(6,616)
Balance end of period			(7,036)			(8,070)			(7,036)			(8,070)

Total shareholders' equity		$	1,560,300		$	1,228,539		$	1,560,300		$	1,228,539

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30, 2023 and 2022

(In thousands)


	Six Months Ended
	June 30,
	2023		2022
Operating activities:
Net income	$	120,257	$	104,077
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,385		1,204
Provision for credit losses		29,470		8,663
Gain on sale of loans		(18,083)		(39,529)
Proceeds from sales of loans		8,388,537		14,491,319
Loans and participations originated and purchased for sale		(8,900,738)		(13,918,978)
Purchases of low-income housing tax credits for sale		(30,117)		(9,829)
Proceeds from sale of low-income housing tax credits		19,804		—
Change in servicing rights for paydowns and fair value adjustments		3,257		(9,367)
Net change in:
Mortgage loans in process of securitization		(144,713)		246,193
Other assets and receivables		(37,233)		(17,738)
Other liabilities		28,294		18,389
Other		(3,140)		371
Net cash (used in) provided by operating activities		(543,020)		874,775
Investing activities:
Net change in securities purchased under agreements to resell		52		2,368
Purchases of securities available for sale		(513,520)		(47,866)
Purchases of securities held to maturity		(4,261)		—
Proceeds from the sale of securities available for sale		132		—
Proceeds from calls, maturities and paydowns of securities available for sale		195,164		12,206
Proceeds from calls, maturities and paydowns of securities held to maturity		61,322		—
Purchases of loans		(269,855)		(92,533)
Net change in loans receivable		(1,805,415)		(1,199,040)
Purchase of FHLB stock		—		(10,326)
Proceeds from sale of FHLB stock		—		784
Purchases of premises and equipment		(2,943)		(5,113)
Purchase of servicing rights		—		(2,057)
Purchase of limited partnership interests		(71,001)		(13,225)
Proceeds from sale of limited partnership interests		52,458		—
Other investing activities		1,322		2,924
Net cash used in investing activities		(2,356,545)		(1,351,878)
Financing activities:
Net change in deposits		2,988,519		(682,875)
Proceeds from borrowings		42,149,880		21,595,000
Repayment of borrowings		(42,240,205)		(21,190,050)
Proceeds from notes payable		26,000		2,000
Proceeds from credit linked notes		153,546		—
Payment of credit linked notes		(2,980)		—
Repurchase of common stock		—		(3,935)
Dividends		(24,253)		(17,505)
Other financing activities		204		—
Net cash provided by (used in) financing activities		3,050,711		(297,365)
Net Change in Cash and Cash Equivalents		151,146		(774,468)
Cash and Cash Equivalents, Beginning of Period		226,164		1,032,614
Cash and Cash Equivalents, End of Period	$	377,310	$	258,146
Supplemental Cash Flows Information:
Interest paid	$	238,521	$	25,191
Income taxes paid, net of refunds		29,813		28,331
Transfer of loans from loans held for sale to loans receivable		377,460		—

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1: Basis of Presentation

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

The accompanying unaudited condensed consolidated balance sheet of the Company as of December 31, 2022, which has been derived from audited financial statements, and unaudited condensed consolidated financial statements of the Company as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022, 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, 2022 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 June 30, 2023 and the results of operations for the three and six months ended June 30, 2023 and 2022, and cash flows for the six months ended June 30, 2023 and 2022. All interim amounts have not been audited and the results of operations for the three and six months ended June 30, 2023, herein are not necessarily indicative of the results of operations to be expected for the entire year.

Principles of Consolidation

The unaudited condensed consolidated financial statements as of and for the period ended June 30, 2023 and 2022 include results from the Company, and its wholly owned subsidiaries, Merchants Bank, FMBI and MAM. Also included are Merchants Bank’s primary operating subsidiaries, MCC, MCS and MCI, as well as all direct and indirectly owned subsidiaries owned by Merchants Bancorp.

In addition, when the Company makes an equity investment in or has a relationship with an entity for which it holds a variable interest, it is evaluated for consolidation requirements under Accounting Standards Update of Topic 810. Accordingly, the entity is assessed for potential consolidation under the variable interest entity (“VIE”) model and would only consolidate those entities for which it is a primary beneficiary. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the entity, and an interest that could be significant to the entity. To determine if an interest could be significant to the entity, both qualitative and quantitative factors regarding the nature, size and form of the Company’s involvement with the entity are evaluated. Alternatively, under the voting interest model, it would only consolidate those entities for which it has a controlling interest.

During the three months ended June 30, 2023, the Company acquired a variable interest in an investment fund for which it is the primary beneficiary of, and its results have been consolidated since the date of acquisition. Additionally, the Company has certain variable interest investments that were not deemed to be primary beneficiaries as of June 30, 2023. These VIEs are not consolidated and the equity or cost method of accounting has been applied. The Company will analyze whether the primary beneficiary designation has changed through triggering events on a prospective basis. Changes in facts and circumstances occurring since the previous primary beneficiary determination will be considered as part of this ongoing assessment. See Note 5: Variable Interest Entities (VIEs) for additional information about VIEs.

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

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Use of Estimates

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

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

Significant Accounting Policies

The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies followed for annual financial reporting.

On January 1, 2022, the Company adopted FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"). The Company revised certain accounting policies and implemented certain accounting policy elections, related to the adoption of CECL, which are described below. All adjustments, which are of a normal recurring nature and are, in the opinion of management, necessary for a fair statement of the results for the periods reported, have been included in the accompanying Condensed Consolidated Financial Statements.

CECL replaces the previous "allowance for loan and lease losses" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the included assets. The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures (“OBCEs”) based on historical experiences, current conditions, and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. In addition, CECL includes certain changes to the accounting for investment securities available for sale depending on whether management intends to sell the securities or believes that it is more likely than not they will be required to sell.

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

ACL-Loans - the ACL-Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged-off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the ACL-Loans are reported in the income statement as a provision for credit loss. Further information regarding the policies and methodology used to estimate the ACL-Loans is detailed in Note 4: Loans and Allowance for credit losses on loans of these Notes to Consolidated Condensed Financial Statements.

ACL-OBCEs – the ACL–OBCEs is a liability account representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. OBCEs primarily consist of amounts available under outstanding lines of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. The ACL–OBCEs is adjusted through the income statement as a component of provision for credit loss.

Restricted Cash

Included in cash equivalents is an account restricted as collateral for the potential risk of loss on senior credit linked notes issued by the Company in March 2023. As of June 30, 2023, there was $35.3 million in restricted cash. Also see Note 11: Borrowings.

Reclassifications

Certain reclassifications may have been made to the 2022 financial statements to conform to the financial statement presentation as of and for the three and six months ended June 30, 2023. These reclassifications had no effect on net income.

Note 2: Investment Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities available for sale and held to maturity were as follows:


	June 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
Securities available for sale:
Treasury notes	$	158,741	$	43	$	849	$	157,935
Federal agencies		249,994		—		8,422		241,572
Mortgage-backed - Government-sponsored entity (GSE)		248,497		6		7		248,496
Total securities available for sale	$	657,232	$	49	$	9,278	$	648,003
Securities held to maturity:
Mortgage-backed - Non-GSE multi-family	$	835,649	$	—	$	42	$	835,607
Mortgage-backed - Non-GSE residential		222,119		—		3,075		219,044
Mortgage-backed - Government - sponsored entity (GSE)		4,249		—		310		3,939
Total securities held to maturity	$	1,062,017	$	—	$	3,427	$	1,058,590

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
Securities available for sale:
Treasury notes	$	37,234	$	1	$	955	$	36,280
Federal agencies		284,986		—		13,096		271,890
Mortgage-backed - Government-sponsored entity (GSE)		15,167		7		7		15,167
Total securities available for sale	$	337,387	$	8	$	14,058	$	323,337
Securities held to maturity:
Mortgage-backed - Non-GSE multi-family	$	871,772	$	12	$	—	$	871,784
Mortgage-backed - Non-GSE residential		247,306		—		124		247,182
Total securities held to maturity	$	1,119,078	$	12	$	124	$	1,118,966

At June 30, 2023 and December 31, 2022, GSE mortgage-backed securities included in the tables above are primarily backed by multi-family loans. The tables above for June 30, 2023 and December 31, 2022 primarily include securities held to maturity that were purchased following the September 2022 loan sale and securitization transactions.

Accrued interest on securities available for sale totaled $1.9 million at June 30, 2023 and $0.5 million at December 31, 2022, respectively, and is excluded from the estimate of credit losses.

Accrued interest on securities held to maturity totaled $4.4 million at June 30, 2023 and $4.3 at December 31, 2022, respectively, and is excluded from the estimate of credit losses.

The amortized cost and fair value of available for sale securities at June 30, 2023 and December 31, 2022, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	June 30, 2023				December 31, 2022
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Securities available for sale:	(In thousands)
Within one year	$	321,992	$	316,487	$	118,984	$	115,386
After one through five years		86,743		83,020		203,236		192,784
		408,735		399,507		322,220		308,170
Mortgage-backed - Government-sponsored entity (GSE)		248,497		248,496		15,167		15,167
	$	657,232	$	648,003	$	337,387	$	323,337
Securities held to maturity:
Mortgage-backed - Non-GSE multi-family	$	835,649	$	835,607	$	871,772	$	871,784
Mortgage-backed - Non-GSE residential		222,119		219,044		—		—
Mortgage-backed - Government - sponsored entity (GSE)		4,249		3,939		247,306		247,182
	$	1,062,017	$	1,058,590	$	1,119,078	$	1,118,966

During the three and six months ended June 30, 2023, proceeds from sales of securities available for sale were $132,000 and the net gain was inconsequential. During the three and six months ended June 30, 2022, no securities available for sale were sold.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following tables show the Company’s gross unrealized losses and fair value of the Company’s investment securities with unrealized losses for which an ACL has not been recorded, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2023 and December 31, 2022:


	June 30, 2023
					12 Months or
	Less than 12 Months				Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

	(In thousands)
Securities available for sale:
Treasury notes	$	7,645	$	101	$	30,185	$	748	$	37,830	$	849
Federal agencies		14,854		146		226,718		8,276		241,572		8,422
Mortgage-backed - Government-sponsored entity (GSE)		444		3		191		4		635		7
	$	22,943	$	250	$	257,094	$	9,028	$	280,037	$	9,278

Securities held to maturity:
Mortgage-backed - Non-GSE multi-family	$	835,607	$	42	$	—	$	—	$	835,607	$	42
Mortgage-backed - Non-GSE residential		219,044		3,075		—		—		219,044		3,075
Mortgage-backed - Government - sponsored entity (GSE)		3,939		310		—		—		3,939		310
	$	1,058,590	$	3,427	$	—	$	—	$	1,058,590	$	3,427


	December 31, 2022
					12 Months or
	Less than 12 Months				Longer				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

	(In thousands)
Securities available for sale:
Treasury notes	$	29,560	$	762	$	5,798	$	193	$	35,358	$	955
Federal agencies		19,276		724		252,613		12,372		271,889		13,096
Mortgage-backed - Government-sponsored entity (GSE)		709		7		—		—		709		7
	$	49,545	$	1,493	$	258,411	$	12,565	$	307,956	$	14,058

Securities held to maturity:
Mortgage-backed - Non-GSE residential		247,182		124		—		—		247,182		124
	$	247,182	$	124	$	—	$	—	$	247,182	$	124

Allowance for Credit Losses

For available for sale securities with an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in accumulated other comprehensive income, net of tax. Credit-related impairment is recognized as an ACL for available for sale securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company expects, or is required, to sell an impaired available for sale security before recovering its amortized cost basis, the entire impairment amount would be recognized

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating available for sale securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized losses on the Company’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. There were no credit related factors underlying unrealized losses on available for sale debt securities at June 30, 2023 and December 31, 2022.

Securities held to maturity are comprised of non-GSE mortgage-backed securities secured by multi-family or single-family properties, and GSE mortgage-backed securities secured by multi-family properties. The GSE security is a Government National Mortgage Association (“Ginnie Mae”) mortgage-backed security and backed by the full faith and credit of the U.S. government. Accordingly, no allowance for credit losses has been recorded for this security. The non-GSE securities were purchased under securitization arrangements where a credit loss component was purchased by third party investors. These securities were evaluated for credit losses over and above the credit loss percentage sold under the arrangements, and the Company does not anticipate any such losses. Additional qualitative factors are evaluated, including the timeliness of principal and interest payments under the contractual terms of the securities. Accordingly, no allowance for credit losses has been recorded for the non-GSE securities.

Note 3: Mortgage Loans in Process of Securitization

Mortgage loans in process of securitization are recorded at fair value with changes in fair value recorded in earnings. These include multi-family rental real estate loan originations to be sold as Ginnie Mae mortgage-backed securities and Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) participation certificates, all of which are pending settlement with firm investor commitments to purchase the securities, typically occurring within 30 days. The fair value increases recorded in earnings for mortgage loans in process of securitization totaled $0.3 million and $4.9 million at June 30, 2023 and 2022, respectively.

Note 4: Loans and Allowance for Credit Losses on Loans

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

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

The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately from the related loan balance in the consolidated balance sheets. Accrued interest on loans totaled $47.7 million and $35.0 million at June 30, 2023 and December 31, 2022, respectively.

The Company also elected not to measure an allowance for credit losses for accrued interest receivables. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest collected on these loans is applied to the principal balance until the loan can be returned to

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

an accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

For all loan portfolio segments, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectable based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations.

When cash payments for accrued interest are received on nonaccrual loans in each loan class, the Company records a reduction in principle on the balance of the loan. For loan modifications, interest income is recognized on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

The Company offers warehouse lines of credit to fund mortgage loans held for sale from closing until sale to an investor. Under a warehousing arrangement the Company funds a mortgage loan as secured financing. The warehousing arrangement is secured by the underlying mortgages and a combination of deposits, personal guarantees and advance rates. The Company typically holds the collateral until it is sent under a bailee arrangement instructing the investor to send proceeds to the Company. Typical investors are large financial institutions or government agencies. Interest earned from the time of funding to the time of sale is recognized as interest income as accrued. Fees earned agreements are recognized when collected as noninterest income.

Loan Portfolio Summary‌

Loans receivable at June 30, 2023 and December 31, 2022 include:


	June 30,		December 31,
	2023		2022

	(In thousands)

Mortgage warehouse lines of credit	$	1,201,932	$	464,785
Residential real estate		1,342,586		1,178,401
Multi-family financing		3,746,333		3,135,535
Healthcare financing		2,128,378		1,604,341
Commercial and commercial real estate(1)(2)		1,394,256		978,661
Agricultural production and real estate		91,599		95,651
Consumer and margin loans		11,920		13,498
		9,917,004		7,470,872
Less:
ACL-Loans		62,986		44,014

Loans Receivable	$	9,854,018	$	7,426,858

(1)

Includes $894.7 million and $497.0 million of revolving lines of credit collateralized primarily by mortgage servicing rights as of June 30, 2023 and December 31, 2022, respectively.

(2)

Includes only $8.3 million and $12.8 million of non-owner occupied commercial real estate as of June 30, 2023 and December 31, 2022, respectively.

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

Mortgage Warehouse Lines of Credit (MTG WHLOC): Under its warehouse program, the Company provides warehouse financing arrangements to approved mortgage companies for the origination and sale of residential mortgage loans and to a lesser extent multi-family loans. Agency eligible, governmental and jumbo residential mortgage loans that

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

are secured by mortgages placed on existing one-to-four family dwellings may be originated or purchased and placed on each mortgage warehouse line.

As a secured repurchase agreement, collateral pledged to the Company secures each individual mortgage until the lender sells the loan in the secondary market. A traditional secured warehouse line of credit typically carries a base interest rate of the Federal Reserve’s Secured Overnight Financing Rate (“SOFR”), or mortgage note rate and a margin.

Risk is evident if there is a change in the fair value of mortgage loans originated by mortgage bankers in warehouse, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit. However, the warehouse customers are required to hedge the change in value of these loans to mitigate the risk.

Residential Real Estate Loans (RES RE): Real estate loans are secured by owner-occupied 1-4 family residences. Repayment of residential real estate loans is primarily dependent on the personal income and credit rating of the borrowers. First-lien HELOC mortgages included in this segment typically carried a base rate of 30-day LIBOR, plus a margin. With the sunset of LIBOR, loans will be transitioned to the One-Year Constant Maturity Treasury (“CMT”), plus a margin.

Multi-Family Financing (MF FIN): The Company engages in multi-family financing, including construction loans, specializing in originating and servicing loans for multi-family rental properties. In addition, the Company originates loans secured by an assignment of federal income tax credits by partnerships invested in multi-family real estate projects. Construction and land loans are generally based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans are dependent on the cash flow of the property, and may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Company’s market area. Repayment of these loans depends on the successful operation of a business or property and the borrower’s cash flows. Loans included in this segment typically carry a base rate of SOFR that adjusts on a monthly basis and a margin.

Healthcare Financing (HC FIN): The healthcare financing portfolio includes customized loan products for independent living, assisted living, memory care and skilled nursing projects. A variety of loan products are available to accommodate rehabilitation, acquisition, and refinancing of healthcare properties. Credit risk in these loans are primarily driven by local demographics and the expertise of the operators of the facilities. Repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained, as well as successful operation of a business or property and the borrower’s cash flows. Loans included in this segment typically carry a base rate of SOFR that adjusts on a monthly basis and a margin.

Commercial Lending and Commercial Real Estate Loans (CML & CRE): The commercial lending and commercial real estate portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions, as well as loans to commercial customers to finance land and improvements. It also includes loans collateralized by servicing rights. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Small Business Administration (“SBA”) loans are included in this category. Less than 1% of total commercial and commercial real estate loans are made up of non-owner occupied commercial real estate loans. The Company strategically focuses on loan classes that are government backed or can be sold in the secondary market.

Agricultural Production and Real Estate Loans (AG & AGRE): Agricultural production loans are generally comprised of seasonal operating lines of credit to grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. The Company also offers long term financing to purchase agricultural real estate. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry-developed estimates of farm input costs and expected commodity

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. The Company is approved to sell agricultural loans in the secondary market through the Federal Agricultural Mortgage Corporation and uses this relationship to manage interest rate risk within the portfolio. Agricultural real estate loans included in this segment are typically structured with a one-year ARM, 3-year ARM or 5-year ARM CMT and a margin. Agriculture production, livestock, and equipment loans are structured with variable rates that are indexed to prime or fixed for terms not exceeding 5 years.

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

ACL-Loans

The Company adopted CECL on January 1, 2022. CECL replaces the previous “Allowance for Loan and Lease Losses” standard for measuring credit losses. Upon adoption of CECL, the difference in the two measurements was recorded in the ACL-Loans and retained earnings.

The ACL-Loans is the Company’s estimate of current expected credit losses. Loans receivable is presented net of the allowance to reflect the principal balance expected to be collected over the contractual term of the loans. This life of loan allowance is established through a provision for credit losses charged to net interest income as loans are recorded in the financial statements. The provision for a reporting period also reflects increases or decreases in the allowance related to changes in credit loss expectations. Actual credit losses are charged against the allowance when management believes the uncollectability of a loan balance, or a portion thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The ACL-Loans is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans considering relevant available information from internal and external sources, including historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The allowance also incorporates reasonable and supportable forecasts. There have been no changes to the credit quality components used to assess risk during the six months ended June 30, 2023. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The level of the ACL is believed to be adequate to absorb current expected future losses in the loan portfolio as of the measurement date.

The ACL-Loans consists of individually evaluated loans and pooled loan components. The Company’s primary portfolio segmentation is by credit risk grade. Loans risk graded substandard and worse are individually evaluated for expected credit losses. For individually evaluated loans that are collateral dependent, the Company may use the fair value of the collateral, less estimated costs to sell, as a practical expedient as of the reporting date to determine the carrying amount of an asset and the allowance for credit losses, as applicable. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or the sale of the collateral when the borrower is experiencing financial difficulty as of the reporting date.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

To calculate the allowance for expected credit losses on loans risk graded pass through special mention, the portfolio is segmented by loans with similar risk characteristics.


Loan Portfolio Segment		ACL-Loans Methodology

Mortgage warehouse lines of credit		Remaining Life Method
Residential real estate loans		Discounted Cash Flow
Multi-family financing		Discounted Cash Flow
Healthcare financing		Discounted Cash Flow
Commercial and commercial real estate		Discounted Cash Flow
Agricultural production and real estate		Remaining Life Method
Consumer and margin loans		Remaining Life Method

Loan characteristics used in determining the segmentation included the underlying collateral, type or purpose of the loan, and expected credit loss patterns. The estimation of expected credit losses for each segment is primarily based on historical credit loss experience. Given the Company’s modest historical credit loss experience, peer and industry data was incorporated into the measurement. Expected life of loan credit losses are quantified using discounted cash flows and remaining life methodologies.

Model results are supplemented by qualitative adjustments for risk factors relevant in assessing the expected credit losses within the portfolio segments. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor.

The models utilized and the applicable qualitative adjustments require assumptions and management judgement that can be subjective in nature. The above measurement approach is also used to estimate the expected credit losses associated with unfunded loan commitments, which also incorporates expected utilization rates.

The following tables present, by loan portfolio segment, the activity in the ACL-Loans for the three and six months ended June 30, 2023 and 2022:


	For the Three Months Ended June 30, 2023
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,664	$	7,378	$	19,851	$	11,753	$	10,482	$	543	$	167	$	51,838
Provision for credit losses		1,697		48		13,250		4,370		1,329		13		(29)		20,678
Loans charged to the allowance		—		(13)		(8,400)		—		(1,118)		—		(1)		(9,532)
Recoveries of loans previously charged-off		—		—		—		—		2		—		—		2
Balance, end of period	$	3,361	$	7,413	$	24,701	$	16,123	$	10,695	$	556	$	137	$	62,986


	For the Three Months Ended June 30, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,941	$	4,547	$	15,131	$	5,618	$	4,102	$	597	$	166	$	32,102
Provision for credit losses		481		363		1,233		2,318		474		(46)		(55)		4,768
Loans charged to the allowance		—		—		—		—		(32)		—		(15)		(47)
Recoveries of loans previously charged-off		—		—		—		—		651		—		—		651
Balance, end of period	$	2,422	$	4,910	$	16,364	$	7,936	$	5,195	$	551	$	96	$	37,474

The Company recorded a total provision for credit losses of $22.6 million for the three months ended June 30, 2023. The $22.6 million total provision for credit losses consisted of $20.7 million for the ACL-Loans as shown above and $1.9 million for the ACL-OBCE’s.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company recorded a total provision for credit losses of $6.2 million for the three months ended June 30, 2022. The $6.2 million total provision for credit losses consisted of $4.8 million for the ACL-Loans as shown above, $0.2 million for the ACL-OBCE’s and $1.2 million for ACL-Guarantees.


	For the Six Months Ended June 30, 2023
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,249	$	7,029	$	16,781	$	9,882	$	8,326	$	565	$	182	$	44,014
Provision for credit losses		2,112		397		16,320		6,241		3,478		(9)		(44)		28,495
Loans charged to the allowance		—		(13)		(8,400)		—		(1,118)		—		(1)		(9,532)
Recoveries of loans previously charged-off		—		—		—		—		9		—		—		9
Balance, end of period	$	3,361	$	7,413	$	24,701	$	16,123	$	10,695	$	556	$	137	$	62,986


	For the Six Months Ended June 30, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,955	$	4,170	$	14,084	$	4,461	$	5,879	$	657	$	138	$	31,344
Impact of adopting CECL		41		275		520		139		(1,277)		(18)		21		(299)
Provision for credit losses		426		465		1,760		3,336		905		(88)		(55)		6,749
Loans charged to the allowance		—		—		—		—		(963)		—		(15)		(978)
Recoveries of loans previously charged-off		—		—		—		—		651		—		7		658
Balance, end of period	$	2,422	$	4,910	$	16,364	$	7,936	$	5,195	$	551	$	96	$	37,474

The Company recorded a total provision for credit losses of $29.5 million for the six months ended June 30, 2023. The $29.5 million total provision for credit losses consisted of $28.5 million for the ACL-Loans as shown above and $1.0 million for the ACL-OBCE’s.

The Company recorded a total provision for credit losses of $8.7 million for the six months ended June 30, 2022. The $8.7 million total provision for credit losses consisted of $6.7 million for the ACL-Loans as shown above, $0.8 million for the ACL-OBCE’s and $1.2 million for ACL-Guarantees.

The following table presents the allowance for loan losses and the recorded investment in loans and impairment method as of December 31, 2022:


	December 31, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,955	$	4,170	$	14,084	$	4,461	$	5,879	$	657	$	138	$	31,344
Impact of adopting CECL		41		275		520		139		(1,277)		(18)		21		(299)
Provision for credit losses		(747)		2,588		2,177		5,282		4,216		(74)		31		13,473
Loans charged to the allowance		—		(4)		—		—		(1,238)		—		(15)		(1,257)
Recoveries of loans previously charged-off		—		—		—		—		746		—		7		753
Balance, end of period	$	1,249	$	7,029	$	16,781	$	9,882	$	8,326	$	565	$	182	$	44,014

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The below table presents the amortized cost basis and ACL-Loans allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses:


	June 30, 2023
	Real Estate		Accounts Receivable / Equipment		Other		Total		ACL-Loans Allocation

	(In thousands)
RES RE	$	209	$	—	$	3	$	212	$	36
MF FIN		41,335		—		—		41,335		234
HC FIN		30,683		—		—		30,683		2,348
CML & CRE		—		3,830		3,294		7,124		1,145
AG & AGRE		147		—		—		147		1
CON & MAR		—		—		5		5		—
Total collateral dependent loans	$	72,374	$	3,830	$	3,302	$	79,506	$	3,764

There have been no significant changes to the types of collateral securing the Company’s collateral dependent loans compared to June 30, 2022.

Internal Risk Categories

In adherence with policy, the Company uses the following internal risk grading categories and definitions for loans:

Pass – Loans that are considered to be of acceptable credit quality, and not classified as Special Mention, Substandard or Doubtful.

Special Mention (Watch) – This is a loan that is sound and collectable but contains potential risk. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following tables present the credit risk profile of the Company’s loan portfolio based on internal risk rating category as of June 30, 2023 and December 31, 2022:


	As of June 30, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		TOTAL

	(In thousands)
MTG WHLOC
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	1,201,932	$	1,201,932
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	1,201,932	$	1,201,932
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
RES RE
Pass		10,295		11,246		8,469		23,210		3,349		11,801		1,273,551		1,341,921
Special Mention (Watch)		—		—		—		—		60		393		—		453
Substandard		—		—		—		—		—		212		—		212
Total	$	10,295	$	11,246	$	8,469	$	23,210	$	3,409	$	12,406	$	1,273,551	$	1,342,586
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	13	$	13
MF FIN
Pass		770,580		1,001,864		391,935		98,073		30,073		9,467		1,330,469		3,632,461
Special Mention (Watch)		13,102		21,512		3,404		8,000		—		1,491		25,028		72,537
Substandard		—		28,360		12,975		—		—		—		—		41,335
Total	$	783,682	$	1,051,736	$	408,314	$	106,073	$	30,073	$	10,958	$	1,355,497	$	3,746,333
Charge-offs	$	—	$	8,400	$	—	$	—	$	—	$	—	$	—	$	8,400
HC FIN
Pass		334,477		1,079,976		236,816		69,827		14,769		—		251,640		1,987,505
Special Mention (Watch)		25,600		48,694		35,896		—		—		—		—		110,190
Substandard		—		—		21,783		—		—		—		8,900		30,683
Total	$	360,077	$	1,128,670	$	294,495	$	69,827	$	14,769	$	—	$	260,540	$	2,128,378
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CML & CRE
Pass		22,265		121,938		75,570		22,578		21,566		18,928		1,099,039		1,381,884
Special Mention (Watch)		16		39		4,510		173		153		334		23		5,248
Substandard		—		—		2,018		933		67		52		4,054		7,124
Total	$	22,281	$	121,977	$	82,098	$	23,684	$	21,786	$	19,314	$	1,103,116	$	1,394,256
Charge-offs	$	—	$	496	$	36	$	586	$	—	$	—	$	—	$	1,118
AG & AGRE
Pass		7,377		10,845		6,664		14,699		5,468		18,769		27,570		91,392
Special Mention (Watch)		—		11		49		—		—		—		—		60
Substandard		—		—		—		—		—		147		—		147
Total	$	7,377	$	10,856	$	6,713	$	14,699	$	5,468	$	18,916	$	27,570	$	91,599
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CON & MAR
Pass		346		4,502		349		155		37		4,451		2,041		11,881
Special Mention (Watch)		—		—		—		18		15		1		—		34
Substandard		—		—		—		—		—		5		—		5
Total	$	346	$	4,502	$	349	$	173	$	52	$	4,457	$	2,041	$	11,920
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	1	$	—	$	1

Total Pass	$	1,145,340	$	2,230,371	$	719,803	$	228,542	$	75,262	$	63,416	$	5,186,242	$	9,648,976
Total Special Mention (Watch)	$	38,718	$	70,256	$	43,859	$	8,191	$	228	$	2,219	$	25,051	$	188,522
Total Substandard	$	—	$	28,360	$	36,776	$	933	$	67	$	416	$	12,954	$	79,506
Total Loans	$	1,184,058	$	2,328,987	$	800,438	$	237,666	$	75,557	$	66,051	$	5,224,247	$	9,917,004
Total Charge-offs	$	—	$	8,896	$	36	$	586	$	—	$	1	$	13	$	9,532

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	December 31, 2022
	2022		2021		2020		2019		2018		Prior		Revolving Loans		TOTAL

	(In thousands)
MTG WHLOC
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	464,785	$	464,785
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	464,785	$	464,785
RES RE
Pass		13,344		8,192		24,708		3,498		1,722		11,166		1,114,705		1,177,335
Special Mention (Watch)		—		—		—		61		—		668		91		820
Substandard		—		—		—		—		74		172		—		246
Total	$	13,344	$	8,192	$	24,708	$	3,559	$	1,796	$	12,006	$	1,114,796	$	1,178,401
MF FIN
Pass		1,212,008		544,823		200,829		32,349		4,416		7,229		1,042,024		3,043,678
Special Mention (Watch)		32,919		—		8,000		—		—		—		14,178		55,097
Substandard		36,760		—		—		—		—		—		—		36,760
Total	$	1,281,687	$	544,823	$	208,829	$	32,349	$	4,416	$	7,229	$	1,056,202	$	3,135,535
HC FIN
Pass		987,676		301,103		78,792		13,770		—		—		123,888		1,505,229
Special Mention (Watch)		52,022		25,307		—		—		—		—		—		77,329
Substandard		—		21,783		—		—		—		—		—		21,783
Total	$	1,039,698	$	348,193	$	78,792	$	13,770	$	—	$	—	$	123,888	$	1,604,341
CML & CRE
Pass		123,757		86,282		23,803		24,730		12,335		8,765		690,114		969,786
Special Mention (Watch)		43		164		963		119		99		228		1,376		2,992
Substandard		—		2,017		591		72		—		666		2,537		5,883
Total	$	123,800	$	88,463	$	25,357	$	24,921	$	12,434	$	9,659	$	694,027	$	978,661
AG & AGRE
Pass		12,112		7,485		15,660		5,808		3,137		20,176		29,566		93,944
Special Mention (Watch)		14		55		462		421		163		389		56		1,560
Substandard		—		—		—		—		—		147		—		147
Total	$	12,126	$	7,540	$	16,122	$	6,229	$	3,300	$	20,712	$	29,622	$	95,651
CON & MAR
Pass		4,673		463		307		101		4,589		9		3,328		13,470
Special Mention (Watch)		—		—		20		—		—		2		—		22
Substandard		—		—		—		—		—		6		—		6
Total	$	4,673	$	463	$	327	$	101	$	4,589	$	17	$	3,328	$	13,498

Total Pass	$	2,353,570	$	948,348	$	344,099	$	80,256	$	26,199	$	47,345	$	3,468,410	$	7,268,227
Total Special Mention (Watch)	$	84,998	$	25,526	$	9,445	$	601	$	262	$	1,287	$	15,701	$	137,820
Total Substandard	$	36,760	$	23,800	$	591	$	72	$	74	$	991	$	2,537	$	64,825
Total Loans	$	2,475,328	$	997,674	$	354,135	$	80,929	$	26,535	$	49,623	$	3,486,648	$	7,470,872

The Company did not have any material revolving loans converted to term loans at June 30, 2023 or December 31, 2022.

The Company evaluates the loan risk grading system definitions and ACL-Loans methodology on an ongoing basis. No significant changes were made to either during the past year.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Delinquent Loans

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of June 30, 2023 and December 31, 2022.


	June 30, 2023
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans

	(In thousands)
MTG WHLOC	$	—	$	—	$	—	$	—	$	1,201,932	$	1,201,932
RES RE		40		236		1,364		1,640		1,340,946		1,342,586
MF FIN		9,332		—		41,335		50,667		3,695,666		3,746,333
HC FIN		14,500		—		21,783		36,283		2,092,095		2,128,378
CML & CRE		451		—		3,778		4,229		1,390,027		1,394,256
AG & AGRE		—		—		—		—		91,599		91,599
CON & MAR		11		—		38		49		11,871		11,920
	$	24,334	$	236	$	68,298	$	92,868	$	9,824,136	$	9,917,004


	December 31, 2022
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans

	(In thousands)
MTG WHLOC	$	—	$	—	$	—	$	—	$	464,785	$	464,785
RES RE		4,053		152		272		4,477		1,173,924		1,178,401
MF FIN		—		—		—		—		3,135,535		3,135,535
HC FIN		—		—		21,783		21,783		1,582,558		1,604,341
CML & CRE		4,759		—		3,778		8,537		970,124		978,661
AG & AGRE		4,903		—		—		4,903		90,748		95,651
CON & MAR		6		24		22		52		13,446		13,498
	$	13,721	$	176	$	25,855	$	39,752	$	7,431,120	$	7,470,872

Nonperforming Loans

Nonaccrual loans, including modified loans that have not met the six-month minimum performance criterion, are reported as nonperforming loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until three months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is doubtful under the terms of the loan agreement. Most generally, this is at 90 or more days past due. The amount of interest income recognized on nonaccrual financial assets during the six months ended June 30, 2023 was immaterial.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents the Company’s nonaccrual loans and loans past due 90 days or more and still accruing at June 30, 2023 and December 31, 2022.


	June 30,				December 31,
	2023				2022
			Total Loans >				Total Loans >
			90 Days &				90 Days &
	Nonaccrual		Accruing		Nonaccrual		Accruing

	(In thousands)
RES RE	$	212	$	1,152	$	245	$	96
MF FIN		41,335		—		—		—
HC FIN		21,783		—		21,783		—
CML & CRE		3,777		—		4,390		—
AG & AGRE		147		—		147		—
CON & MAR		5		34		6		16
	$	67,259	$	1,186	$	26,571	$	112

The Company did not have any nonperforming loans without an estimated ACL at June 30, 2023.

Modifications to Borrowers Experiencing Financial Difficulty

On January 1, 2023, the Company adopted FASB Accounting Standards Update (“ASU”) No. 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, which eliminates the recognition and measurement of a troubled debt restructuring (“TDR”). The Company adopted the prospective approach for this new guidance.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period.

The following table presents the amortized cost basis of loans at June 30, 2023 that were both experiencing financial difficulty and modified during the six months ended June 30, 2023, by class and by type of modification. There were no loans modified for borrowers experiencing financial difficulty during the three months ended June 30, 2023. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:


	For the Six Months Ended June 30, 2023
	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Principal Forgiveness		Combination Term Extension Interest Rate Reduction		Total Class of Financing Receivable

	(In thousands)
Commercial and commercial real estate	$	—	$	3,778	$	—	$	—	$	—	$	—		—	%
Total	$	—	$	3,778	$	—	$	—	$	—	$	—		—	%

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The financial effects of the modifications in the table above include an increase in the weighted average term for commercial and commercial real estate loans of three months. The Company has committed to lend no additional amounts to the borrowers included in the table above.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified in the last twelve months:


	30 ‑ 59 Days		60 ‑ 89 Days		Greater Than		Total
	Past Due		Past Due		90 Days		Past Due

	(In thousands)
Commercial and commercial real estate	$	—	$	—	$	3,778	$	3,778
Total	$	—	$	—	$	3,778	$	3,778

No modified loans defaulted during the three or six months ended June 30, 2023.

Foreclosures

There were no residential loans in process of foreclosure as of June 30, 2023 and December 31, 2022.

Loans Purchased

The Company purchased $269.9 million and $92.5 million of loans during the six months ended June 30, 2023 and 2022, respectively.

Note 5: Variable Interest Entities (VIEs)

A VIE is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets generally that either:

●

Does not have equity investors with voting rights that can directly or indirectly make decisions about the entity’s activities through those voting rights or similar rights; or

●

Has equity investors that do not provide sufficient equity for the entity to finance its activities without additional subordinated financial support.

The Company has invested in single-family, multi-family, and healthcare debt financing entities, as well as low-income housing syndicated funds that are deemed to be VIEs. The Company also has deemed as a VIE, a real estate mortgage investment conduit (“REMIC”) trust that was established in conjunction with the September 2022 multi-family loan sale and securitization transaction. Accordingly, the entities were assessed for potential consolidation under the VIE model that requires primary beneficiaries to consolidate the entity’s results. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the entity, and an interest that could be significant to the entity. To determine if an interest could be significant to the entity, both qualitative and quantitative factors regarding the nature, size and form of involvement with the entity are evaluated.

At June 30, 2023 the Company determined it was not the primary beneficiary for most of its VIEs, primarily because the Company did not have the obligation to absorb losses or the rights to receive benefits from the VIE that could potentially be significant to the VIE. Evaluation and assessment of VIEs for consolidation is performed on an

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

ongoing basis by management. Any changes in facts and circumstances occurring since the previous primary beneficiary determination will be considered as part of this ongoing assessment.

The Company’s maximum exposure to loss associated with its unconsolidated VIEs consists of the capital invested plus any unfunded equity commitments. These investments are recorded in other assets and other liabilities on our consolidated balance sheet. The table below reflects the size of the VIEs as well as our maximum exposure to loss in connection with VIEs at June 30, 2023 and December 31, 2022.


	Total		Total		Maximum
Assets ($ in thousands)	Assets		Liabilities		Exposure to Loss

	(In thousands)
June 30, 2023
Unconsolidated VIEs	$	124,736	$	82,262	$	124,736
December 31, 2022
Unconsolidated VIEs	$	52,125	$	25,564	$	52,125

In addition to the table above, the Company also has a VIE in a REMIC trust that was established in September 2022 in conjunction with a loan sale and securitization. Although the trust is not recognized on the balance sheet, the maximum exposure to loss is the carrying value of the security acquired as part of the securitization transaction, which was $835.6 million and $871.8 million at June 30, 2023 and December 31, 2022, respectively.

Note 6: Regulatory Matters

The Company, Merchants Bank, and FMBI are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by federal and state banking regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company, Merchants Bank, and FMBI must meet specific capital guidelines that involve quantitative measures of the Company’s, Merchants Bank’s, and FMBI’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s, Merchants Bank’s, and FMBI’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, and other factors. Furthermore, the Company’s, Merchants Bank’s, and FMBI’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company, Merchants Bank, and FMBI to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of June 30, 2023 and December 31, 2022, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject.

As of June 30, 2023 and December 31, 2022, the most recent notifications from the Board of Governors of the Federal Reserve System (“Federal Reserve”) categorized the Company as well capitalized and most recent notifications from the Federal Deposit Insurance Corporation (“FDIC”) categorized Merchants Bank and FMBI as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s, Merchants Bank’s, or FMBI’s category.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company’s, Merchants Bank’s, and FMBI’s actual capital amounts and ratios are presented in the following tables.


					Minimum				Minimum
					Amount Required				Amount To Be
					for Adequately				Well
	Actual				Capitalized⁽¹⁾				Capitalized⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
June 30, 2023
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,625,223	11.3	%	$	1,148,948	8.0	%	$	—	N/A	%
Merchants Bank		1,563,433	11.1	%		1,127,989	8.0	%		1,409,986	10.0
FMBI		37,536	11.3	%		26,636	8.0	%		33,295	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,549,763	10.8	%		861,711	6.0	%		—	N/A	%
Merchants Bank		1,488,730	10.6	%		845,992	6.0	%		1,127,989	8.0
FMBI		36,779	11.0	%		19,977	6.0	%		26,636	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,050,155	7.3	%		646,284	4.5	%		—	N/A	%
Merchants Bank		1,488,730	10.6	%		634,494	4.5	%		916,491	6.5
FMBI		36,779	11.0	%		14,983	4.5	%		21,642	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,549,763	10.6	%		586,227	4.0	%		—	N/A	%
Merchants Bank		1,488,730	10.4	%		574,725	4.0	%		718,406	5.0
FMBI		36,779	10.6	%		13,823	4.0	%		17,279	5.0	%

(1)

As defined by regulatory agencies.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)


					Minimum				Minimum
					Amount Required				Amount To Be
					for Adequately				Well
	Actual				Capitalized⁽¹⁾				Capitalized⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
December 31, 2022
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,507,968	12.2	%	$	992,883	8.0	%	$	—	N/A	%
Merchants Bank		1,427,738	11.7	%		975,853	8.0	%		1,219,817	10.0	%
FMBI		34,769	11.3	%		24,703	8.0	%		30,878	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,452,456	11.7	%		744,662	6.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		731,890	6.0	%		975,853	8.0	%
FMBI		34,054	11.0	%		18,527	6.0	%		24,703	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		952,848	7.7	%		558,497	4.5	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		548,917	4.5	%		792,881	6.5	%
FMBI		34,054	11.0	%		13,895	4.5	%		20,071	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,452,456	11.7	%		497,604	4.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		487,511	4.0	%		609,389	5.0	%
FMBI		34,054	10.7	%		12,702	4.0	%		15,878	5.0	%

(1)

As defined by regulatory agencies.

Note 7: Derivative Financial Instruments

The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities.

Forward Sales Commitments, Interest Rate Lock Commitments, and Interest Rate Swaps

The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.

Interest rate swaps are also used by the Company to reduce the risk that significant increases in interest rates may have on the value of certain fixed rate loans held for sale and the respective loan payments received from borrowers. All changes in the fair market value of these interest rate swaps and associated loans held for sale have been included in gain on sale of loans. Any difference between the fixed and floating interest rate components of these transactions have been included in interest income.

All of these items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in other assets in the condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities in the condensed consolidated balance sheets.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents the notional amount and fair value of interest rate locks, forward contracts, and interest rate swaps utilized by the Company at June 30, 2023 and December 31, 2022. This table excludes the fair market value adjustment on loans associated with these derivatives.


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability

June 30, 2023		(In thousands)			(In thousands)
Interest rate lock commitments	$	24,216	Other assets/liabilities	$	94	$	68
Forward contracts	$	27,125	Other assets/liabilities		111		7
Interest rate swaps	$	57,557	Other assets/liabilities		3,291		—
				$	3,496	$	75


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability

December 31, 2022		(In thousands)			(In thousands)
Interest rate lock commitments	$	8,759	Other assets/liabilities	$	28	$	23
Forward contracts	$	13,096	Other assets/liabilities		46		52
Interest rate swaps	$	57,574	Other assets/liabilities		3,030		—
				$	3,104	$	75

Fair values of these derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the interest rate lock commitment and the balance sheet date. The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the three and six months ended June 30, 2023 and 2022.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022

	(In thousands)					(In thousands)
Derivative gain (loss) included in gain on sale of loans:
Interest rate lock commitments	$	(188)	$	837	$	21	$	(45)
Forward contracts (includes pair-off settlements)		376		1,309		280		4,459
Interest rates swaps		1,597		160		261		160
Net derivative gains (loss)	$	1,785	$	2,306	$	562	$	4,574

Derivatives on Behalf of Customers

The Company offers derivative contracts to some customers in connection with their risk management needs. These derivatives include back-to-back interest rate swaps. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred, typically resulting in no net earnings impact.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The fair values of derivative assets and liabilities related to derivatives for customers with back-to-back interest rate swaps were recorded in the condensed consolidated balance sheets as follows:


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability

		(In thousands)			(In thousands)
June 30, 2023	$	218,291	Other assets/liabilities	$	9,477	$	9,477
December 31, 2022	$	77,495	Other assets/liabilities	$	3,041	$	3,041

The gross gains and losses on these derivative assets and liabilities were recorded in other noninterest income and other noninterest expense in the condensed consolidated statements of income as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022

	(In thousands)					(In thousands)
Gross swap gains	$	7,016	$	2,035	$	6,436	$	2,531
Gross swap losses		7,016		2,035		6,436		2,531
Net swap gains (losses)	$	—	$	—	$	—	$	—

The Company pledged $0 in collateral to secure its obligations under swap contracts at both June 30, 2023 and December 31, 2022.

Note 8: Disclosures about Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recurring Measurements

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2023 and December 31, 2022:


	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)

	(In thousands)
June 30, 2023
Mortgage loans in process of securitization	$	298,907	$	—	$	298,907	$	—
Securities available for sale:
Treasury notes		157,935		157,935		—		—
Federal agencies		241,572		—		241,572		—
Mortgage-backed - Government-sponsored entity (GSE)		248,496		—		248,496		—
Loans held for sale		82,931		—		82,931		—
Servicing rights		147,288		—		—		147,288
Derivative assets - interest rate lock commitments		94		—		—		94
Derivative assets - forward contracts		111		—		111		—
Derivative assets - interest rate swaps		3,291		—		3,291		—
Derivative assets - interest rate swaps (back-to-back)		9,477		—		9,477		—
Derivative liabilities - interest rate lock commitments		68		—		—		68
Derivative liabilities - forward contracts		7		—		7		—
Derivative liabilities - interest rate swaps (back-to-back)		9,477		—		9,477		—


December 31, 2022
Mortgage loans in process of securitization	$	154,194	$	—	$	154,194	$	—
Securities available for sale:
Treasury notes		36,280		36,280		—		—
Federal agencies		271,890		—		271,890		—
Mortgage-backed - Government-sponsored entity (GSE)		15,167		—		15,167		—
Loans held for sale		82,192		—		82,192		—
Servicing rights		146,248		—		—		146,248
Derivative assets - interest rate lock commitments		28		—		—		28
Derivative assets - forward contracts		46		—		46		—
Derivative assets - interest rate swaps		3,030		—		3,030		—
Derivative assets - interest rate swaps (back-to-back)		3,041		—		3,041		—
Derivative liabilities - interest rate lock commitments		23		—		—		23
Derivative liabilities - forward contracts		52		—		52		—
Derivative liabilities - interest rate swaps (back-to-back)		3,041		—		3,041		—

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the six months ended June 30, 2023 and the year ended December 31, 2022. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Mortgage Loans in Process of Securitization and Securities Available for Sale

Where quoted market prices are available in an active market, securities such as U.S. Treasuries are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy including federal agencies, mortgage-backed securities, municipal securities and Federal Housing Administration participation certificates. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Loans Held for Sale

Certain loans held for sale at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices, or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.

Servicing Rights

Servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed, cost of servicing, interest rates, and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy.

The Chief Financial Officer’s (CFO) office contracts with an independent pricing specialist to generate fair value estimates on a quarterly basis. The CFO’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States.

Derivative Financial Instruments

The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage backed security prices, estimates of the fair value of the servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of expenses. With respect to its interest rate lock commitments, management determined that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its interest rate lock commitments. The Company estimates the fair value of forward sales commitments based on market quotes of mortgage-backed security prices for securities similar to the ones used, which are considered Level 2. The fair value of interest rate swaps is based on prices that are obtained from a third party that uses observable market inputs, thereby supporting a Level 2 classification. Changes in fair value of the Company’s derivative financial instruments are recognized through noninterest income and/or noninterest expenses on its condensed consolidated statement of income.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(In thousands)				(In thousands)
Servicing rights
Balance, beginning of period	$	143,867	$	121,036	$	146,248	$	110,348
Additions
Originated servicing		2,124		5,203		4,297		10,995
Subtractions
Paydowns		(2,073)		(3,268)		(3,771)		(6,017)
Sales of servicing		—		—		—		—
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model		3,370		7,739		514		15,384
Balance, end of period	$	147,288	$	130,710	$	147,288	$	130,710

Derivative Assets - interest rate lock commitments
Balance, beginning of period	$	218	$	112	$	28	$	264
Changes in fair value		(124)		187		66		35
Balance, end of period	$	94	$	299	$	94	$	299

Derivative Liabilities - interest rate lock commitments
Balance, beginning of period	$	4	$	771	$	23	$	41
Changes in fair value		64		(650)		45		80
Balance, end of period	$	68	$	121	$	68	$	121

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2023 and December 31, 2022.


	Fair Value Measurements Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)

	(In thousands)
June 30, 2023
Impaired loans (collateral-dependent)	$	40,839	$	—	$	—	$	40,839
December 31, 2022
Impaired loans (collateral-dependent)	$	4,465	$	—	$	—	$	4,465

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Collateral Dependent Loans, Net of ACL-Loans

The estimated fair value of collateral dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral dependent loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer’s (“CCO)” office. Appraisals and evaluations are reviewed for accuracy and consistency by the CCO’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the CCO’s office by comparison to historical results.

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.


			Valuation			Weighted
	Fair Value		Technique	Unobservable Inputs	Range	Average
	(In thousands)
At June 30, 2023:
Collateral dependent loans	$	40,839	Market comparable properties	Marketability discount	0% - 23%	1%
Servicing rights - Multi-family	$	111,756	Discounted cash flow	Discount rate	8% - 13%	9%
				Constant prepayment rate	1% - 100%	7%
Servicing rights - Single-family	$	30,466	Discounted cash flow	Discount rate	9% - 10%	9%
				Constant prepayment rate	7% - 14%	7%
Servicing rights - SBA	$	5,066	Discounted cash flow	Discount rate	16%	16%
				Constant prepayment rate	3% - 16%	8%
Derivative assets - interest rate lock commitments	$	94	Discounted cash flow	Loan closing rates	50% - 99%	79%
Derivative liabilities - interest rate lock commitments	$	68	Discounted cash flow	Loan closing rates	50% - 99%	79%

At December 31, 2022:
Collateral dependent loans	$	4,465	Market comparable properties	Marketability discount	4% - 54%	5%
Servicing rights - Multi-family	$	111,690	Discounted cash flow	Discount rate	8% - 13%	9%
				Constant prepayment rate	0 - 39%	8%
Servicing rights - Single-family	$	29,926	Discounted cash flow	Discount rate	9% - 10%	9%
				Constant prepayment rate	7% - 10%	7%
Servicing rights - SBA	$	4,632	Discounted cash flow	Discount rate	16%	16%
				Constant prepayment rate	3% - 12%	8%
Derivative assets - interest rate lock commitments	$	28	Discounted cash flow	Loan closing rates	60% - 87%	77%
Derivative liabilities - interest rate lock commitments	$	23	Discounted cash flow	Loan closing rates	60% - 87%	77%

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement, and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Servicing Rights

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights are discount rates and constant prepayment rates. These two inputs can drive a significant amount of a market participant’s valuation of servicing rights. Significant increases (decreases) in the discount rate or assumed constant prepayment rates used to value servicing rights would decrease (increase) the value derived.

Fair Value of Financial Instruments

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2023 and December 31, 2022.


			Fair Value Measurements Using
					Quoted Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
Assets	Value		Value		(Level 1)		(Level 2)		(Level 3)

	(In thousands)
June 30, 2023
Financial assets:
Cash and cash equivalents	$	377,310	$	377,310	$	377,310	$	—	$	—
Securities purchased under agreements to resell		3,412		3,412		—		3,412		—
Securities held to maturity		1,062,017		1,058,590		—		222,983		835,607
FHLB stock		39,130		39,130		—		39,130		—
Loans held for sale		2,975,082		2,975,082		—		2,975,082		—
Loans receivable, net		9,854,018		9,817,979		—		—		9,817,979
Interest receivable		70,509		70,509		—		70,509		—
Financial liabilities:
Deposits		13,059,864		13,057,747		7,878,580		5,179,167		—
Short-term subordinated debt		47,000		47,000		—		47,000		—
FHLB advances		736,132		735,695		—		735,695		—
Other borrowing		82,934		82,934		—		82,934		—
Credit linked notes		150,770		151,720		—		151,720		—
Interest payable		25,489		25,489		—		25,489		—

December 31, 2022
Financial assets:
Cash and cash equivalents	$	226,164	$	226,164	$	226,164	$	—	$	—
Securities purchased under agreements to resell		3,464		3,464		—		3,464		—
Securities held to maturity		1,119,078		1,118,966		—		247,182		871,784
FHLB stock		39,130		39,130		—		39,130		—
Loans held for sale		2,828,384		2,828,384		—		2,828,384		—
Loans receivable, net		7,426,858		7,431,731		—		—		7,431,731
Interest receivable		56,262		56,262		—		56,262		—
Financial liabilities:
Deposits		10,071,345		10,064,941		7,082,056		2,982,885		—
Short-term subordinated debt		21,000		21,000		—		21,000		—
FHLB advances		859,392		858,984		—		858,984		—
Other borrowing		50,000		50,000		—		50,000		—
Interest payable		23,384		23,384		—		23,384		—

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 9: Leases

The Company has operating leases for various locations with terms ranging from two to eleven years. Some operating leases include options to extend. The extensions were included in the right-of-use asset if the likelihood of extension was fairly certain. The Company elected not to separate non-lease components from lease components for its operating leases.

The Company has operating lease right-of-use assets of $11.1 million and operating lease right-of-use liabilities of $12.3 million as of June 30, 2023.

Balance sheet, income statement and cash flow detail regarding operating leases follows:


		June 30, 2023		December 31, 2022
Balance Sheet		(In thousands)		(In thousands)
Operating lease right-of-of use asset (in other assets)	$	11,050	$	10,969
Operating lease liability (in other liabilities)		12,326		11,992

Weighted average remaining lease term (years)		6.3		6.5
Weighted average discount rate		2.86%		2.65%

Maturities of lease liabilities:
One year or less	$	1,243	$	2,181
Year two		2,441		2,321
Year three		2,064		1,881
Year four		2,100		1,911
Year five		2,046		1,853
Thereafter		3,566		2,902
Total future minimum lease payments		13,460		13,049
Less: imputed interest		1,134		1,057
Total	$	12,326	$	11,992

		Three Months Ended		Three Months Ended
		June 30, 2023		June 30, 2022
Income Statement		(In thousands)		(In thousands)
Components of lease expense:
Operating lease cost (in occupancy and equipment expense)	$	666	$	425

		Six Months Ended		Six Months Ended
		June 30, 2023		June 30, 2022
Income Statement		(In thousands)		(In thousands)
Components of lease expense:
Operating lease cost (in occupancy and equipment expense)	$	1,249	$	792

		Six Months Ended		Six Months Ended
		June 30, 2023		June 30, 2022
Cash Flow Statement		(In thousands)		(In thousands)
Supplemental cash flow information:
Operating cash flows from operating leases	$	886	$	597

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 10: Deposits

Deposits were comprised of the following at June 30, 2023 and December 31, 2022:


	June 30, 2023		December 31,
	2023		2022

	(In thousands)
Noninterest-bearing deposits
Demand deposits	$	349,387	$	326,875
Total noninterest-bearing deposits		349,387		326,875
Interest-bearing deposits
Demand deposits	$	4,583,080	$	3,720,363
Savings deposits		2,946,113		3,034,818
Certificates of deposit		5,181,284		2,989,289
Total interest-bearing deposits		12,710,477		9,744,470
Total deposits	$	13,059,864	$	10,071,345

Maturities for certificates of deposit are as follows:


	June 30, 2023
	(In thousands)
Due within one year	$	5,018,137
Due in one year to two years		117,566
Due in two years to three years		43,816
Due in three years to four years		1,016
Due in four years to five years		749
Due in five years to six years		—
	$	5,181,284

Brokered deposit amounts at June 30, 2023 and December 31, 2022, were as follows:


	June 30,		December 31,
	2023		2022

	(In thousands)
Brokered certificates of deposit	$	4,619,798	$	2,681,198
Brokered savings deposits		6,243		81,532
Brokered deposit on demand accounts		125,108		13
	$	4,751,149	$	2,762,743

Note 11: Borrowings

Borrowings were comprised of the following at June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022

	(In thousands)
Federal Reserve discount window borrowings	$	75,000	$	20,000
Short-term subordinated debt		47,000		21,000
FHLB advances		736,132		859,392
American Financial Exchange borrowing		—		30,000
Credit linked notes		150,770		—
Other borrowings		7,934		—
Total borrowings	$	1,016,836	$	930,392

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On March 30, 2023, Merchants Bank of Indiana issued and sold credit linked notes, due May 26, 2028. The notes are secured by a restricted collateral account which the Company is required to maintain with a third-party financial institution. The collateral account maintains an amount equal to at least the initial aggregate unpaid principal of the notes. As of June 30, 2023, the account included $35.3 million of restricted cash and the acquisition of $119.9 million in short-term Treasury securities. These are reported as cash equivalents and securities available for sale in the consolidated balance sheets.

In April 2023, the Company entered into a warehouse financing arrangement, whereby a customer agreed to invest up to $45 million in the Company’s subordinated debt. The subordinated debt balance as of June 30, 2023 was $11.0 million. As of June 30, 2023, interest on the debt is paid quarterly by the Company at a rate equal to SOFR, plus 300 bps. The agreement matures on December 1, 2023, and automatically extends for one year unless 180 day notification is received from either party.

During the three months ended June 30, 2023, the Company acquired a variable interest in an investment fund for which it is the primary beneficiary of, and the results are consolidated since the date of acquisition. The fund obtained a loan from an external party, and had a balance of $7.9 million as of June 30, 2023. Interest on the debt will accrue at the rate of 1.00% per year until it matures in 2047.

Note 12: Earnings Per Share

Earnings per share were computed as follows:


	Three Month Periods Ended June 30,
	2023					2022
			Weighted-	Per				Weighted-	Per
	Net		Average	Share		Net		Average	Share
	Income		Shares	Amount		Income		Shares	Amount
	(In thousands)					(In thousands)
Net income	$	65,302				$	53,935
Dividends on preferred stock		(8,668)					(5,729)
Net income allocated to common shareholders	$	56,634				$	48,206
Basic earnings per share			43,235,398	$	1.31			43,209,824	$	1.12
Effect of dilutive securities-restricted stock awards			73,995					125,387
Diluted earnings per share			43,309,393	$	1.31			43,335,211	$	1.11


	Six Month Periods Ended June 30,
	2023					2022
			Weighted-	Per				Weighted-	Per
	Net		Average	Share		Net		Average	Share
	Income		Shares	Amount		Income		Shares	Amount
	(In thousands)					(In thousands)
Net income	$	120,257				$	104,077
Dividends on preferred stock		(17,335)					(11,457)
Net income allocated to common shareholders	$	102,922				$	92,620
Basic earnings per share			43,207,655	$	2.38			43,220,198	$	2.14
Effect of dilutive securities-restricted stock awards			92,585					147,677
Diluted earnings per share			43,300,240	$	2.38			43,367,875	$	2.14

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 13: Share-Based Payment Plans

Equity-based incentive awards for Company officers are currently issued pursuant to the 2017 Equity Incentive Plan (the “2017 Incentive Plan”). During the three months ended June 30, 2023 and 2022, the Company did not issue any shares. During the six months ended June 30, 2023 and 2022, the Company issued 84,335 and 64,962 shares, respectively.

During 2018, the Compensation Committee of the Board of Directors approved a plan for non-executive directors to receive a portion of their annual retainer fees in the form of shares of common stock equal to $10,000, rounded up to the nearest whole share. In January 2021, the Board of Directors amended the plan for nonexecutive directors to receive a portion of their annual fees, issued quarterly, in the form of restricted common stock equal to $50,000 per member, rounded up to the nearest whole share, to be effective after the Company’s annual meeting of shareholders held in May 2021. Accordingly, there were 3,682 and 3,766 shares, issued to non-executive directors during the three months ended June 30, 2023 and 2022, respectively and there were 6,545 and 5,821 shares, issued to non-executive directors during the six months ended June 30, 2023 and 2022, respectively.

The Company established an employee stock ownership plan (“ESOP”) effective as of January 1, 2020 to provide certain benefits for all employees who meet certain requirements. There was no expense recognized for the contribution to the ESOP during the three months ended June 30, 2023 and 2022. Expense recognized for the contribution to the ESOP totaled $810,000 and $653,000 for the six months ended June 30, 2023 and 2022, respectively. The Company contributed 33,293 shares and 20,709 shares to the ESOP for the six months ended June 30, 2023 and 2022, respectively.

Note 14: Segment Information

Our Company’s business segments are defined as Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. The reportable business segments are consistent with the internal reporting and evaluation of the principal lines of business of the Company. The Multi-family Mortgage Banking segment originates and services government sponsored mortgages for multi-family and healthcare facilities. It is also a fully integrated syndicator of low-income housing tax credit and debt funds. The Mortgage Warehousing segment funds agency eligible residential loans from the date of origination or purchase, until the date of sale in the secondary market, as well as commercial loans to non-depository financial institutions. The Banking segment provides a wide range of financial products and services to consumers and businesses, including retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and Small Business Administration (“SBA”) lending. Other includes general and administrative expenses that provide services to all segments; internal funds transfer pricing offsets resulting from allocations to/from the other segments, certain elimination entries and investments in qualified affordable housing limited partnerships. All operations are domestic.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The tables below present selected business segment financial information for the three and six months ended June 30, 2023 and 2022.


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other		Total

Three Months Ended June 30, 2023	(In thousands)
Interest income	$	1,248	$	64,267	$	191,406	$	1,148	$	258,069
Interest expense		13		42,984		111,311		(1,856)		152,452
Net interest income		1,235		21,283		80,095		3,004		105,617
Provision for credit losses		—		2,320		20,283		—		22,603
Net interest income after provision for credit losses		1,235		18,963		59,812		3,004		83,014
Noninterest income		30,325		2,872		(760)		(2,555)		29,882
Noninterest expense		19,962		3,617		12,118		8,623		44,320
Income (loss) before income taxes		11,598		18,218		46,934		(8,174)		68,576
Income taxes		356		(378)		4,284		(988)		3,274
Net income (loss)	$	11,242	$	18,596	$	42,650	$	(7,186)	$	65,302
Total assets	$	373,680	$	4,474,832	$	10,784,596	$	241,764	$	15,874,872


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other		Total

Three Months Ended June 30, 2022	(In thousands)
Interest income	$	383	$	23,247	$	63,578	$	2,062	$	89,270
Interest expense		—		5,576		12,036		(373)		17,239
Net interest income		383		17,671		51,542		2,435		72,031
Provision for credit losses		1,153		834		4,225		—		6,212
Net interest income after provision for credit losses		(770)		16,837		47,317		2,435		65,819
Noninterest income		49,430		1,350		(10,252)		(1,357)		39,171
Noninterest expense		21,959		2,441		2,634		5,923		32,957
Income (loss) before income taxes		26,701		15,746		34,431		(4,845)		72,033
Income taxes		7,145		3,878		8,499		(1,424)		18,098
Net income (loss)	$	19,556	$	11,868	$	25,932	$	(3,421)	$	53,935
Total assets	$	330,676	$	2,836,998	$	7,835,152	$	83,229	$	11,086,055

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Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other		Total

	(In thousands)
Six Months Ended June 30, 2023
Interest income	$	2,354	$	106,585		358,132	$	2,292	$	469,363
Interest expense		13		70,778		195,837		(3,575)		263,053
Net interest income		2,341		35,807		162,295		5,867		206,310
Provision for credit losses		—		3,684		25,786		—		29,470
Net interest income after provision for credit losses		2,341		32,123		136,509		5,867		176,840
Noninterest income		46,922		3,905		(1,949)		(4,732)		44,146
Noninterest expense		34,593		6,372		22,288		15,839		79,092
Income (loss) before income taxes		14,670		29,656		112,272		(14,704)		141,894
Income taxes		1,462		2,419		20,315		(2,559)		21,637
Net income (loss)	$	13,208	$	27,237	$	91,957	$	(12,145)	$	120,257
Total assets	$	373,680	$	4,474,832	$	10,784,596	$	241,764	$	15,874,872


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other			Total

	(In thousands)
Six Months Ended June 30, 2022
Interest income	$	640	$	43,576	$	117,303	$	3,763	$	165,282
Interest expense		—		7,597		20,553		(624)		27,526
Net interest income		640		35,979		96,750		4,387		137,756
Provision for credit losses		1,153		627		6,883		—		8,663
Net interest income after provision for credit losses		(513)		35,352		89,867		4,387		129,093
Noninterest income		81,616		3,210		(8,063)		(2,995)		73,768
Noninterest expense		38,490		5,367		9,208		10,925		63,990
Income (loss) before income taxes		42,613		33,195		72,596		(9,533)		138,871
Income taxes		11,565		8,168		17,900		(2,839)		34,794
Net income (loss)	$	31,048	$	25,027	$	54,696	$	(6,694)	$	104,077
Total assets	$	330,676	$	2,836,998	$	7,835,152	$	83,229	$	11,086,055

Note 15: Recent Accounting Pronouncements

The Company continually monitors potential accounting pronouncement and SEC release changes. No new pronouncements or releases are expected to be applicable to the Company.

Note 16: Subsequent Events

No material events were noted.

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Forward-Looking Statements

Certain statements in this Form 10-Q, including, but not limited to, statements within Management’s Discussion and Analysis of Financial Condition and Results of Operations, are “forward-looking statements” within the meaning of the rules and regulations of the Securities and Exchange Commission (“SEC”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized”, and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022 or “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q or the following:

●

business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

●

our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses on loans;

●

factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions;

●

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, and tax matters;

●

our ability to maintain licenses required in connection with residential and multi-family mortgage origination, sale, and servicing operations;

●

our ability to identify and address cyber-security risks, fraud, and systems errors;

●

our ability to effectively execute our strategic plan and manage our growth;

●

changes in our senior management team and our ability to attract, motivate, and retain qualified personnel;

●

governmental monetary and fiscal policies, and changes in market interest rates;

●

liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

●

effects of competition from a wide variety of local, regional, national, and other providers of financial, investment and insurance services;

●

the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; and

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●

changes in federal tax law or policy.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise.

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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 June 30, 2023 and results of operations for the three and six months ended June 30, 2023 and 2022, 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 June 30, 2023

●

Net income of $65.3 million increased 21% compared to June 30, 2022 and diluted earnings per share of $1.31 increased 18% compared to June 30, 2022.

●

The 21% increase in net income was primarily driven by a $33.6 million, or 47%, increase in net interest income, a $14.8 million, or 82%, decrease in the provision for income tax, a $16.4 million, or 264%, increase in provision for credit losses, a $11.4 million, or 34%, increase in noninterest expense, and a $10.2 million, or 47%, decrease in gain on sale of loans.

●

During the three months ended June 30, 2023, the Company recorded a $13.0 million tax benefit related to tax refunds receivable and changes to its state tax apportionment calculations, which was offset by credit events that totaled approximately $14.8 million, primarily for the impact of a multi-family loan charge-off, an increase in specific reserves for a healthcare customer, and changes to qualitative factors and forecasted loss rates.

●

Total assets of $15.9 billion increased 11% compared to March 31, 2023, and increased 26% compared to December 31, 2022.

●

As of June 30, 2023, the Company had $5.3 billion, or 34%, of total assets, in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window, based on available collateral.

●

The Company’s most liquid assets are in unrestricted cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable. Taken together, with unused borrowing capacity, these totaled $10.2 billion, or 64%, of the $15.9 billion in total assets as of June 30, 2023.

●

Uninsured deposits totaled approximately $2 billion as of June 30, 2023, representing less than 20% of total deposits.

●

Loans receivable of $9.9 billion, net of allowance for credit losses on loans, increased $1.3 billion, or 15%, compared to March 31, 2023, and increased $2.4 billion, or 33%, compared to December 31, 2022.

●

Efficiency ratio was 32.7% compared to 29.6% for the three months ended June 30, 2022.

●

As of June 30, 2023, approximately 94% of the total net loans at Merchants Bank reprice within three months, which reduces the risk of market rate increases.

●

Tangible book value per common share of $24.14 increased 23% compared to $19.70 for the three months ended June 30, 2022.

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●

The volume of warehouse loans funded during the three months ended June 30, 2023 amounted to $8.4 billion, a decrease of $459.1 million, or 5%, compared to the three months ended June 30, 2022. This compared to the 32% industry decrease in single-family residential loan volumes for the three months ended June 30, 2023 to the same period in 2022, according to an estimate of industry volume by the Mortgage Bankers Association.

●

The volume of loans originated and acquired for sale in the secondary market through our multi-family business increased by $261.8 million, or 64%, to $668.2 million, compared to $406.4 million for the three months ended June 30, 2022.

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 multiple business segments, including Multi-family Mortgage Banking that offers multi-family housing and healthcare facility financing and servicing, as well as syndicated low-income housing tax credit and debt funds; Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers portfolio lending for multi-family and healthcare facility loans, retail and correspondent residential mortgage banking, agricultural lending, Small Business Administration (“SBA”) lending, and traditional community banking.

Our business consists primarily of funding fixed rate, low risk, multi-family, residential and SBA loans meeting underwriting standards of government programs under an originate to sell model, and retaining adjustable rate loans as held for investment to reduce interest rate risk. The gain on sale of these loans and servicing fees contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, brokered deposits, and short-term borrowing. 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 which serves to maximize net income and higher than industry 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 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, 2022. 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, 2022.

Financial Condition

As of June 30, 2023, we had approximately $15.9 billion in total assets, $13.1 billion in deposits and $1.6 billion in total shareholders’ equity. Total assets as of June 30, 2023 included approximately $377.3 million of cash and cash equivalents, $3.1 billion of loans held for sale and $9.9 billion of loans receivable, net of ACL-loans. Assets also included $298.9 million of mortgage loans in process of securitization 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 was also $1.1 billion in securities held to maturity that were primarily acquired in conjunction with the securitization of loans that the Company originated. Additionally, we

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had $648.0 million in securities available for sale that are typically match funded with related custodial deposits or required to collateralize our credit-linked notes. There are some restrictions on the types of securities we hold, particularly for those that are funded by certain custodial deposits where we set the cost of deposits based on the yield of the related securities. Servicing rights at June 30, 2023 were $147.3 million based on the fair value of the loan servicing, which are primarily GNMA multi-family servicing rights with 10-year call protection.

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

Total Assets. Total assets increased $3.3 billion, or 26%, to $15.9 billion at June 30, 2023 from $12.6 billion at December 31, 2022. The increase was due primarily to significant growth in the mortgage warehouse, multi-family, and healthcare loan portfolios.

Cash and Cash Equivalents. Cash and cash equivalents increased $151.1 million, or 67%, to $377.3 million at June 30, 2023 from $226.2 million at December 31, 2022. The 67% increase reflected higher liquidity to fund anticipated loan growth. Included in cash equivalents was $35.3 million in restricted cash associated with the March 2023 issuance of senior credit linked notes described in Note 11: Borrowings.

Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization increased $144.7 million, or 94%, to $298.9 million at June 30, 2023, from $154.2 million at December 31, 2022. These represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as GNMA or other agency mortgage-backed securities with a firm investor commitment to purchase the securities. The 94% increase was primarily due to an increase in the volume of loans that had not yet settled with government agencies.

Securities Available for Sale. Securities available for sale increased $324.7 million, or 100%, to $648.0 million at June 30, 2023, from $323.3 million at December 31, 2022. The increase in available for sale securities was primarily due to purchases of $513.5 million and a decrease of unrealized loss on securities of $4.8 million, partially offset by calls, maturities, repayments and sales of securities totaling $195.2 million during the period.

As of June 30, 2023, Accumulated Other Comprehensive Losses (“AOCL”) of $7.0 million losses, related to securities available for sale, decreased $3.5 million, or 33%, compared to losses of $10.5 million at December 31, 2022. The $7.0 million of AOCL losses as of June 30, 2023 represented less than 1% of total equity and 1% of total securities available for sale.

Securities Held to Maturity. Securities held to maturity decreased $57.1 million, or 5%, to $1.1 billion at June 30, 2023 from December 31, 2022. The decrease was primarily due to purchases of $4.3 million offset by calls, maturities and repayments of securities totaling $61.3 million during the period.

Loans Held for Sale. Loans held for sale, comprised primarily of single-family residential real estate loan participations that meet Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), or Ginnie Mae (“GNMA”) eligibility, increased $147.4 million, or 5%, to $3.1 billion at June 30, 2023 from $2.9 billion at December 31, 2022. The increase in loans held for sale was due primarily to a increase in warehouse participations, as the industry experienced higher volume.

Loans Receivable. Loans receivable, which are comprised of loans held for investment, increased $2.4 billion, or 33%, to $9.9 billion at June 30, 2023 compared to December 31, 2022. The increase was comprised primarily of:

●

an increase of $737.1 million, or 159%, in mortgage warehouse lines of credit, to $1.2 billion at June 30, 2023,

●

an increase of $610.8 million, or 19%, in multi-family financing loans, to $3.7 billion at June 30, 2023,

●

an increase of $524.0 million, or 33%, in healthcare financing loans, to $2.1 billion at June 30, 2023,

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●

an increase of $415.6 million, or 42%, in commercial and commercial real estate loans, to $1.4 billion at June 30, 2023, and

●

an increase of $164.2 million, or 14%, in residential real estate loans, to $1.3 billion at June 30, 2023.

The $737.1 million increase in mortgage warehouse lines of credit was due to higher loan volume.

The $610.8 million increase in multi-family 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 $524.0 million increase in healthcare financing was due to transfers of loans previously in loans held for sale, associated with our credit link note transaction.

The $415.6 million increase in commercial and commercial real estate was due to higher revolving lines of credit on collateralized mortgage servicing rights during the period.

The $164.2 million increase in residential real estate loans was primarily due an increase in All-in-One®, first-lien HELOCs.

As of June 30, 2023, approximately 94% of the total net loans at Merchants Bank reprice within three months, which reduces the risk of market rate increases.

Allowance for Credit Losses on Loans (“ACL-Loans”). The ACL-Loans of $63.0 million at June 30, 2023 increased $19.0 million compared to $44.0 million at December 31, 2022. The increase was primarily due to:

●

loan growth in the period,

●

replenishment of $8.2 million related to the charge-off of a loan in the multi-family portfolio,

●

a $4.6 million increase related to changes in qualitative factors and forecasted loss rates to reflect changes in industry conditions, such as the impact of higher rates, and

●

a $2.0 million increase in net specific reserves, primarily related to a loan in the healthcare portfolio.

The increases were partially offset by charge-offs of $9.5 million, primarily associated with a multi-family customer.

Also influencing the overall level of the ACL-Loans 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 June 30, 2023 remained unchanged compared to December 31, 2022. At this time, we do not believe there exists any impairment to goodwill or intangible assets.

Servicing Rights. Servicing rights increased $1.0 million, or 1%, to $147.3 million at June 30, 2023 compared to $146.3 million at December 31, 2022. During the six months ended June 30, 2023, originated servicing of $4.3 million and a positive fair market value adjustment of $0.5 million were partially offset by paydowns of $3.8 million. 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 servicing rights are recorded and carried at fair value. The fair value increase recorded during the six months ended June 30, 2023 was driven by higher loan balances of mortgages serviced and higher interest rates that impacted fair market value adjustments. The value of servicing rights generally increases in rising interest rate environments and declines in falling interest rate environments due to expected prepayments.

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Other Assets and Receivables. Other assets and receivables increased $105.1 million, or 67%, to $262.5 million at June 30, 2023 compared to $157.4 million at December 31, 2022. The 67% increase in other assets and receivables was primarily due to the acquisition of low-income housing tax credit investments.

Deposits. Deposits increased $3.0 billion, or 30%, to $13.1 billion at June 30, 2023 from $10.1 billion at December 31, 2022. The 30% increase in total deposits was primarily due to a $2.2 billion increase in certificates of deposit and a $885.2 million increase in demand deposits, partially offset by a decrease of $88.7 million in savings deposits. As of June 30, 2023, approximately 83% of the total deposits at Merchants Bank reprice within three months.

Uninsured deposits totaled approximately $2 billion as of June 30, 2023, representing less than 20% of total deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.7 billion as of June 30, 2023.

We increased our use of brokered deposits by $2.0 billion, or 72%, to $4.8 billion at June 30, 2023 compared to December 31, 2022. Brokered deposits represented 36% of total deposits at June 30, 2023, compared to 27% of total deposits at December 31, 2022.

●

Brokered certificates of deposit accounts increased by $1.9 billion, or 72%, to $4.6 billion at June 30, 2023 compared to December 31, 2022.

●

Brokered demand deposit accounts increased by $125.1 million, to $125.1 million at June 30, 2023 compared to December 31, 2022.

●

Brokered savings deposits accounts decreased $75.3 million, or 92%, to $6.2 million at June 30, 2023 compared to December 31, 2022.

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 Federal Deposit Insurance Corporation (“FDIC”).

Compared to December 31, 2022, interest-bearing deposits increased $3.0 billion, or 30%, to $12.7 billion at June 30, 2023, and noninterest-bearing deposits increased $22.5 million, or 7%, to $349.4 million at June 30, 2023.

Borrowings. Borrowings totaled $1.0 billion at June 30, 2023, an increase of $86.4 million, or 9%, from December 31, 2022. The increase was primarily due to the issuance of senior credit linked notes described in Note 11: Borrowings. Depending on rates and timing, borrowing can be a more effective liquidity management alternative than utilizing brokered certificates of deposits. The Company primarily utilizes borrowing facilities from the FHLB, the Federal Reserve’s discount window, and the American Financial Exchange (“AFX”).

The Company continues to have significant borrowing capacity based on available collateral. As of June 30, 2023, unused lines of credit totaled $5.3 billion, compared to $3.1 billion at December 31, 2022.

Other Liabilities. Other liabilities increased $87.7 million, or 65%, to $221.8 million at June 30, 2023 compared to $134.1 million at December 31, 2022. The 65% increase in other liabilities was primarily due to unfunded commitments for low-income housing tax credit investments.

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Total Shareholders’ Equity. Total shareholders’ equity was $1.6 billion as of June 30, 2023, compared to $1.5 billion as of December 31, 2022. The $100.6 million increase resulted primarily from net income of $120.3 million, which was partially offset by dividends paid on common and preferred shares of $24.3 million during the period.

Asset Quality

Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $68.4 million, or 0.69%, of total loans at June 30, 2023, compared to $26.7 million, or 0.36%, of total loans at December 31, 2022 and $4.8 million, or 0.07%, at June 30, 2022. The increase in non-performing loans compared to both periods was primarily due to 3 customers, while the remainder of our loan portfolio continued to generally perform as expected.

As a percentage of nonperforming loans, the ACL-Loans was 92% at June 30, 2023 compared to 165% at December 31, 2022 and 778.6% at June 30, 2022. The decrease compared to both periods were primarily due to the increases in the nonperforming loans.

Total loans greater than 30 days past due were $92.9 million at June 30, 2023, $39.8 million at December 31, 2022, and $4.9 million at June 30, 2022. The increase in non-performing loans compared to both periods was primarily due to 3 customers.

Special Mention (Watch) loans were $188.5 million at June 30, 2023, compared to $137.8 million at December 31, 2022 and $131.2 million at June 30, 2022.

During the three months ended June 30, 2023 there were $9.5 million of charge-offs and $2,000 of recoveries, compared to $47,000 of charge-offs and $651,000 recoveries for the three months ended June 30, 2022.

For the six months ended June 30, 2023, there were $9.5 million of charge-offs and $16,000 of recoveries, compared to $978,000 of charge-offs and $658,000 of recoveries for the six months ended June 30, 2022.

Comparison of Operating Results for the Three Months Ended June 30, 2023 and 2022

General. Net income of $65.3 million for the three months ended June 30, 2023 increased by $11.4 million, or 21%, compared to the three months ended June 30, 2022. The increase was primarily driven by a $33.6 million, or 47%, increase in net interest income, a $14.8 million, or 82%, decrease in the provision for income tax, a $16.4 million, or 264%, increase in provision for credit losses, a $11.4 million, or 34%, increase in noninterest expense, and a $10.2 million, or 47%, decrease in gain on sale of loans. Included in the results were the following:

●

a $13.0 million tax benefit related to tax refunds receivable and changes to its state tax apportionment calculations described in the Provision for Income Tax section below, and

●

credit events that totaled approximately $14.8 million for the impact of a multi-family loan charge-off, an increase in specific reserves for a healthcare customer, and changes to qualitative factors and forecasted loss rates, described in the Provision for Credit Losses section below.

Net Interest Income. Net interest income increased $33.6 million, or 47%, to $105.6 million for the three months ended June 30, 2023, compared with $72.0 million for the three months ended June 30, 2022. The 47% increase reflected a $168.8 million, or 189%, increase in interest income from higher yields and average loan balances, partially offset by a $135.2 million increase in interest expense from higher interest rates on deposits and higher average rates on borrowings, primarily related to the credit linked notes issued by the Company during the three months ended March 31, 2023. The interest rate spread of 2.41% for the three months ended June 30, 2023 decreased 49 basis points compared to 2.90% in the three months ended June 30, 2022.

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Our net interest margin decreased 6 basis points, to 2.97%, for the three months ended June 30, 2023 from 3.03% for the three months ended June 30, 2022.

Interest Income. Interest income increased $168.8 million, or 189%, to $258.1 million for the three months ended June 30, 2023, compared with $89.3 million for the three months ended June 30, 2022. This increase was primarily attributable to an increase in both higher average yields and balances of loans and loans held for sale, as well as higher balances in securities held to maturity.

The average balance of loans, including loans held for sale, during the three months ended June 30, 2023 increased $3.3 billion, or 38%, to $12.0 billion compared to the three months ended June 30, 2022. The average yield on loans increased 368 basis points, to 7.67% for the three months ended June 30, 2023, compared to 3.99% for the three months ended June 30, 2022. The increase in average balances of loans and loans held for sale was primarily due to increases in the multi-family and healthcare portfolios, but all loan portfolios contributed to the growth during the period.

The average balance of securities held to maturity, during the three months ended June 30, 2023 increased $1.1 billion, or 100%, to $1.1 billion compared to the three months ended June 30, 2022, as none were owned as of June 30, 2022. The average yield on securities held to maturity was 6.35% for the three months ended June 30, 2023.

The average balance of securities available for sale increased $342.1 million, or 103%, to $672.9 million for the three months ended June 30, 2023 from $330.8 million for the three months ended June 30, 2022, while the average yield increased 221 basis points, to 3.32% for the three months ended June 30, 2023, compared to 1.11% for the three months ended June 30, 2022.

The average balance of interest-earning deposits and other decreased $117.8 million, or 32%, to $249.7 million for the three months ended June 30, 2023 from $367.5 million for the three months ended June 30, 2022, while the average yield increased 437 basis points, to 5.36% for the three months ended June 30, 2023, compared to 0.99% for the three months ended June 30, 2022.

The average balance of mortgage loans in process of securitization increased $81.7 million, or 41%, to $280.1 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, while the average yield increased 155 basis points, to 4.48% for the three months ended June 30, 2023, compared to 2.93% for the three months ended June 30, 2022.

Interest Expense. Total interest expense increased $135.2 million, or 784%, to $152.5 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

Interest expense on deposits increased $123.0 million, or 833%, to $137.8 million for the three months ended June 30, 2023 from $14.8 million for the three months ended June 30, 2022. The increase was primarily due to higher rates on certificates of deposit, interest-bearing checking, and money market accounts.

The average balance of certificates of deposit of $4.7 billion for the three months ended June 30, 2023 increased $4.1 billion, or 639%, compared to the three months ended June 30, 2022. The average yield of certificates of deposit was 4.98% for the three months ended June 30, 2023, which was a 423 basis point increase compared to 0.75% for three months ended June 30, 2022.

The average balance of interest-bearing checking accounts of $4.3 billion for the three months ended June 30, 2023 increased $457.9 million, or 12%, compared to $3.8 billion for the three months ended June 30, 2022. The average yield of interest-bearing checking accounts was 4.50% for the three months ended June 30, 2023, which was a 378 basis point increase compared to 0.72% for three months ended June 30, 2022.

The average balance of money market accounts of $2.7 billion for the three months ended June 30, 2023 increased $122.6, or 5%, compared to $2.6 billion for the three months ended June 30, 2022. The average yield of money market

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accounts was 4.45% for the three months ended June 30, 2023, which was a 345 basis point increase compared to 1.00% for three months ended June 30, 2022.

Interest expense on borrowings increased $12.2 million, or 493%, to $14.7 million for the three months ended June 30, 2023 from $2.5 million for the three months ended June 30, 2022. The increase reflected an 862 basis points increase in the average cost of borrowings, to 9.94% compared to 1.32% for the three months ended June 30, 2022. The increase was primarily related to the credit linked notes issued by the Company during the three months ended June 30, 2023. Partially offsetting the higher rates on borrowing was a $158.3 million, or 21%, decrease in the average balance of borrowings of $591.3 million compared to $749.6 million for the three months ended June 30, 2022. Also included in borrowings, our warehouse structured financing agreements provide for additional interest payments for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 9.53% and 0.80%, to an effective rate of 9.94% and 1.32% for the three months ended June 30, 2023 and 2022, respectively.

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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.


	Three Months Ended June 30,
	2023						2022
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollars in thousands)
Assets:
Interest-bearing deposits, and other	$	249,722	$	3,335	5.36	%	$	367,540	$	910	0.99	%
Securities available for sale - taxable		672,887		5,564	3.32	%		330,759		917	1.11	%
Securities held to maturity		1,093,018		17,311	6.35	%		—		—	—	%
Mortgage loans in process of securitization		280,092		3,127	4.48	%		198,349		1,449	2.93	%
Loans and loans held for sale		11,968,565		228,732	7.67	%		8,643,276		85,994	3.99	%
Total interest-earning assets		14,264,284		258,069	7.26	%		9,539,924		89,270	3.75	%
Allowance for credit losses on loans		(54,411)						(33,401)
Noninterest-earning assets		463,384						314,355
Total assets	$	14,673,257					$	9,820,878

Liabilities/Equity:
Interest-bearing checking	$	4,307,736	$	48,296	4.50	%	$	3,849,876	$	6,945	0.72	%
Savings deposits		236,012		299	0.51	%		238,944		62	0.10	%
Money market		2,749,594		30,521	4.45	%		2,626,973		6,567	1.00	%
Certificates of deposit		4,729,242		58,685	4.98	%		639,556		1,194	0.75	%
Total interest-bearing deposits		12,022,584		137,801	4.60	%		7,355,349		14,768	0.81	%
Borrowings		591,333		14,651	9.94	%		749,628		2,471	1.32	%
Total interest-bearing liabilities		12,613,917		152,452	4.85	%		8,104,977		17,239	0.85	%
Noninterest-bearing deposits		346,837						402,328
Noninterest-bearing liabilities		167,527						97,682
Total liabilities		13,128,281						8,604,987
Equity		1,544,976						1,215,891
Total liabilities and equity	$	14,673,257					$	9,820,878
Net interest income			$	105,617					$	72,031
Interest rate spread					2.41	%					2.90	%
Net interest-earning assets	$	1,650,367					$	1,434,947
Net interest margin					2.97	%					3.03	%
Average interest-earning assets to average interest-bearing liabilities					113.08	%					117.70	%

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.

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The following table summarizes the increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates:


	Three Months Ended June 30, 2023
	compared to June 30, 2022
	Increase (Decrease)
	Due to
(Dollars in thousands)	Volume		Rate		Total
Interest income
Interest-bearing deposits and other	$	(292)	$	2,717	$	2,425
Securities available for sale - taxable		949		3,698		4,647
Securities held to maturity		17,311		—		17,311
Mortgage loans in process of securitization		597		1,081		1,678
Loans and loans held for sale		33,084		109,654		142,738
Total interest income		51,649		117,150		168,799
Interest expense
Deposits
Interest-bearing checking		826		40,525		41,351
Savings deposits		(1)		238		237
Money market deposits		307		23,647		23,954
Certificates of deposit		7,635		49,856		57,491
Total Deposits		8,767		114,266		123,033
Borrowings		(522)		12,702		12,180
Total interest expense		8,245		126,968		135,213
Net interest income	$	43,404	$	(9,818)	$	33,586

Provision for Credit Losses. We recorded a total provision for credit losses of $22.6 million for the three months ended June 30, 2023, an increase of $16.4 million, compared to the three months ended June 30, 2022. The increase was primarily due to:

●

loan growth in the period,

●

replenishment of $8.2 million related to the charge-off of a loan in the multi-family portfolio,

●

a $4.6 million increase related to changes in qualitative factors and forecasted loss rates to reflect changes in industry conditions, such as the impact of higher rates, and

●

a $2.0 million increase in net specific reserves, primarily related to a loan in the healthcare portfolio.

The $22.6 million total provision for credit losses consisted of $20.7 million for the ACL-Loans and $1.9 million for the ACL-OBCE’s. The ACL-Loans was $63.0 million, or 0.64%, of total loans, at June 30, 2023, compared to $44.0 million, or 0.59%, of total loans, at December 31, 2022, and $37.5 million, or 0.53%, at June 30, 2023.

Noninterest Income. Noninterest income decreased $9.3 million, or 24%, to $29.9 million for the three months ended June 30, 2023 compared to $39.2 million for the three months ended June 30, 2022. The decrease was primarily due to a $10.2 million, or 47%, decrease in gain on sale of loans associated with a business mix shift in multi-family lending, from volumes sold in the secondary market towards those maintained on the balance sheet.

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A summary of the gain on sale of loans for the three months ended June 30, 2023 and 2022 is below:


		Gain on Sale of Loans
		Three Months Ended
		June 30,		June 30,
		2023		2022

		(in thousands)
Loan Type
Multi-family	$	10,361	$	19,623
Single-family		202		406
Small Business Association (SBA)		787		1,535
Total	$	11,350	$	21,564

A $1.0 million, or 10%, decrease in loan servicing fees also contributed to the lower noninterest income. Loan servicing fees included a $3.4 million positive fair market value adjustment to servicing rights for the three months ended June 30, 2023, compared to a $7.7 million positive adjustment to fair value of servicing rights for the three months ended June 30, 2022.

Noninterest Expense. Noninterest expense increased $11.4 million, or 34%, to $44.3 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase was due primarily to a $3.2 million, or 14%, increase in salaries and employee benefits to support loan growth, as well as a $3.1 million, or 468%, increase in FDIC deposit insurance expenses, reflecting our growth in assets, Higher professional fees also contributed $2.1 million to the increase. The efficiency ratio was at 32.71% for the three months ended June 30, 2023, compared with 29.64% for the three months ended June 30, 2022.

Income Taxes. Provision for income tax decreased $14.8 million, or 82%, to $3.3 million for the three months ended June 30, 2023, compared to $18.1 million for the three months ended June 30, 2022. The decrease reflected a $13.0 million tax benefit related to tax refunds receivable and changes to state tax apportionment calculations.

During the three months ended June 30, 2023, the Company received an advisory letter it had requested from the State of Indiana related to certain state tax apportionment provisions in the Indiana Financial Institution Tax Code and Regulations. The advisory letter provided guidance related to the methodology used to determine and source the receipts in the state of Indiana for the Company’s mortgage origination and warehousing service lines. In effect, the guidance provided the Company the ability to revise its state income tax apportionment calculation to reduce its Indiana tax and related deferred tax liabilities. As such, the Company will amend several of its state returns and request the respective refunds. In anticipation of the refunds, a receivable was established as of June 30, 2023. On July 21, 2023, the company received a final revenue ruling from the Indiana Department of Revenue supporting the revised methodology. Additionally, the change in methodology is expected to result in a 1.0% to 1.5% reduction in the Company’s overall effective tax rate in the future.

The effective tax rate was 4.8% for the three months ended June 30, 2023 and 25.1% for the three months ended June 30, 2022.

Comparison of Operating Results for the Six Months Ended June 30, 2023 and 2022

General. Net income for the six months ended June 30, 2023 was $120.3 million, an increase of $16.2 million, or 16%, from net income of $104.1 million for the six months ended June 30, 2022. The increase was primarily due to a $68.6 million increase in net interest income and a $13.2 million decrease in provision for income taxes that was

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partially offset by a $29.6 million decrease in noninterest income, a $20.8 million increase in the provision for credit losses, and an $15.1 million increase in noninterest expense. Included in the results were the following:

●

a $13.0 million tax benefit related to tax refunds receivable and changes to its state tax apportionment calculations described in the Provision for Income Tax section below, and

●

credit events that occurred during the three months ended June 30, 2023 totaling approximately $14.8 million for the impact of a multi-family loan charge-off, an increase in specific reserves for a healthcare customer, and changes to qualitative factors and forecasted loss rates, described in the Provision for Credit Losses section below.

Net Interest Income. Net interest income increased $68.6 million, or 50%, to $206.3 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The 50% increase reflected a $304.1 million, or 184%, increase in interest income from higher yields and average loan balances, partially offset by a $235.5 million, or 856%, increase in interest expense from higher interest rates and average balances of deposits. The interest rate spread of 2.57% for the six months ended June 30, 2023 decreased 15 basis points compared to 2.72% in the six months ended June 30, 2022.

Our net interest margin increased 29 basis points, to 3.11%, for the six months ended June 30, 2023 from 2.82% for the six months ended June 30, 2022.

Interest Income. Interest income increased $304.1 million, or 184%, to $469.4 million for the six months ended June 30, 2023, compared with $165.3 million for the six months ended June 30, 2022. This increase was primarily attributable to an increase in higher average yields and loan balances, as well as higher balances of held to maturity securities that were acquired after June 30, 2022.

The average balance of loans, including loans held for sale, during the six months ended June 30, 2023 increased $2.9 billion, or 35%, to $11.3 billion compared to the six months ended June 30, 2022, and the average yield on loans increased 365 basis points, to 7.47% for the six months ended June 30, 2023, compared to 3.82% for the six months ended June 30, 2022.

The average balance of securities held to maturity, during the six months ended June 30, 2023 increased $1.1 billion, or 100%, to $1.1 billion compared to the six months ended June 30, 2022, as none were owned as of June 30, 2022. The average yield on securities held to maturity was 6.04% for the three months ended June 30, 2023.

The average balance of securities available for sale increased $241.6 million, or 76%, to $559.9 million for the six months ended June 30, 2023, from the six months ended June 30, 2022, and the average yield increased 179 basis points, to 2.82% for the six months ended June 30, 2023, compared to 1.03% for the six months ended June 30, 2022.

The average balance of interest-earning deposits and other decreased $693.7 million, or 76%, to $217.3 million for the six months ended June 30, 2023, from $911.0 million for the six months ended June 30, 2022, and the average yield increased 472 basis points, to 5.11% for the six months ended June 30, 2023, compared to 0.39% for the six months ended June 30, 2022.

Interest Expense. Total interest expense increased $235.5 million, or 856%, to $263.1 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Interest expense on deposits increased $218.7 million, or 927%, to $242.2 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The increase was primarily due to increases in interest rates on certificates of deposit, interest-bearing checking and money market accounts.

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The average balance of certificates of deposit accounts was $4.0 billion for the six months ended June 30, 2023, an increase of $3.2 billion, or 369%, compared to the six months ended June 30, 2022. The average yield on certificates of deposit accounts was 4.68% for the six months ended June 30, 2023, which was a 409 basis point increase compared to 0.59% for six months ended June 30, 2022.

The average balance of interest-bearing checking accounts of $4.2 billion for the six months ended June 30, 2023 increased $248.3 million, or 6%, compared to $3.9 billion for the six months ended June 30, 2022. The average yield of interest-bearing checking accounts was 4.29% for the six months ended June 30, 2023, which was a 382 basis point increase compared to 0.47% for six months ended June 30, 2022.

The average balance of money market accounts of $2.8 billion for the six months ended June 30, 2023 increased $130.0 million, or 5%, compared to $2.7 million for the six months ended June 30, 2022. The average yield of money market accounts was 4.26% for the six months ended June 30, 2023, which was a 337 basis point increase compared to 0.89% for six months ended June 30, 2022.

Interest expense on borrowings increased $16.9 million, or 428%, to $20.8 million for the six months ended June 30, 2023 from the six months ended June 30, 2022. The increase was due primarily to a 662 basis points increase in the average cost of borrowings to 7.81% compared to 1.19% for the six months ended June 30, 2022. The increase was primarily related to the credit linked notes issued by the Company during the three months ended June 30, 2023. The higher average rates were partially offset by a $132.7 million decrease in average balances compared to the six months ended June 30, 2022. Additionally, borrowings include our warehouse structured financing agreements that provide for additional interest payments for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 7.43% and 0.61%, to an effective rate of 7.81% and 1.19% for the six months ended June 30, 2023 and 2022, respectively.

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	Six Months Ended June 30,
	2023						2022
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollars in thousands)
Assets:
Interest-bearing deposits, and other	$	217,276	$	5,511	5.11	%	$	910,994	$	1,780	0.39	%
Securities available for sale - taxable		559,878		7,830	2.82	%		318,249		1,618	1.03	%
Held to maturity securities		1,104,069		33,065	6.04	%		—		—	—	%
Mortgage loans in process of securitization		220,046		4,775	4.38	%		273,272		3,694	2.73	%
Loans and loans held for sale		11,285,909		418,182	7.47	%		8,348,216		158,190	3.82	%
Total interest-earning assets		13,387,178		469,363	7.07	%		9,850,731		165,282	3.38	%
Allowance for credit losses on loans		(49,826)						(32,219)
Noninterest-earning assets		447,082						308,451
Total assets	$	13,784,434					$	10,126,963

Liabilities/Equity:

Interest-bearing checking	$	4,180,614	$	88,943	4.29	%	$	3,932,334	$	9,149	0.47	%
Savings deposits		236,647		565	0.48	%		234,846		95	0.08	%
Money market		2,798,774		59,129	4.26	%		2,668,735		11,819	0.89	%
Certificates of deposit		4,030,001		93,606	4.68	%		858,779		2,518	0.59	%
Total interest-bearing deposits		11,246,036		242,243	4.34	%		7,694,694		23,581	0.62	%
Borrowings		537,328		20,810	7.81	%		670,055		3,945	1.19	%
Total interest-bearing liabilities		11,783,364		263,053	4.50	%		8,364,749		27,526	0.66	%
Noninterest-bearing deposits		325,596						459,914
Noninterest-bearing liabilities		154,547						107,319
Total liabilities		12,263,507						8,931,982
Equity		1,520,927						1,194,981
Total liabilities and equity	$	13,784,434					$	10,126,963
Net interest income			$	206,310					$	137,756
Interest rate spread					2.57	%					2.72	%
Net interest-earning assets	$	1,603,814					$	1,485,982
Net interest margin					3.11	%					2.82	%
Average interest-earning assets to average interest-bearing liabilities					113.61	%					117.76	%

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The following table summarizes the increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates:


	Six Months Ended June 30, 2023
	compared to June 30, 2022
	Increase (Decrease)
	Due to
(Dollars in thousands)	Volume		Rate		Total
Interest income
Interest-bearing deposits and other	$	(1,355)	$	5,086	$	3,731
Securities available for sale - taxable		1,228		4,984		6,212
Securities held to maturity		33,065		—		33,065
Mortgage loans in process of securitization		(719)		1,800		1,081
Loans and loans held for sale		55,666		204,326		259,992
Total interest income		87,885		216,196		304,081
Interest expense
Deposits
Interest-bearing checking		578		79,216		79,794
Savings deposits		1		469		470
Money market deposits		576		46,734		47,310
Certificates of deposit		9,298		81,790		91,088
Total Deposits		10,453		208,209		218,662
Borrowings		(781)		17,646		16,865
Total interest expense		9,672		225,855		235,527
Net interest income	$	78,213	$	(9,659)	$	68,554

Provision for Loan Losses. We recorded a provision for credit losses of $29.5 million for the six months ended June 30, 2023, an increase of $20.8 million, or 240%, compared to $8.7 million for the six months ended June 30, 2022. The increase was primarily due to:

●

loan growth in the period,

●

replenishment of $8.2 million related to the charge-off of a loan in the multi-family portfolio,

●

a $4.6 million increase related to changes in qualitative factors and forecasted loss rates to reflect changes in industry conditions, such as the impact of higher rates, and

●

a $2.0 million increase in net specific reserves, primarily related to a loan in the healthcare portfolio.

The $29.5 million total provision for credit losses consisted of $28.5 million for the ACL-Loans and $1.0 million for the ACL-OBCE’s. The ACL-Loans was $63.0 million, or 0.64%, of total loans, at June 30, 2023, compared to $44.0 million, or 0.59%, of total loans, at December 31, 2022, and $37.5 million, or 0.53%, at June 30, 2022.

Noninterest Income. Noninterest income decreased $29.6 million, or 40%, to $44.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease was primarily due to a $21.4 million, or 54%, decrease in gain on sale of loans associated with a shift in business mix to programs with lower average trade pricing in the multi-family loan portfolio, as well as lower single-family and multi-family secondary market volumes.

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A summary of the gain on sale of loans for the six months ended June 30, 2023 and 2022 is below:


		Gain on Sale of Loans
		Six Months Ended
		June 30,		June 30,
		2023		2022

		(in thousands)
Loan Type
Multi-family	$	15,281	$	34,576
Single-family		479		863
Small Business Association (SBA)		2,323		4,090
Total	$	18,083	$	39,529

Also contributing to the lower noninterest income was an $8.4 million decrease in loan servicing fees compared to the six months ended June 30, 2022. Included in loan servicing fees was a $0.5 million positive adjustment to the fair value of servicing rights for the six months ended June 30, 2023, compared to a positive adjustment of $15.4 million for the six months ended June 30, 2022.

Partially offsetting the decreases in noninterest income was a $2.9 million increase in syndication and asset management fees compared to the six months ended June 30, 2022. This line of business is becoming a meaningful source of noninterest income.

Noninterest Expense. Noninterest expense increased $15.1 million, or 24%, to $79.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase was primarily due to a $4.6 million, or 319%, increase in deposit insurance expense, reflecting asset growth. Also contributing to the higher noninterest expenses was a $4.1 million increase in salaries and employee benefits to support loan growth, as well as a $3.1 million increase in professional fees. The efficiency ratio was at 31.58% in the six months ended June 30, 2023, compared with 30.25% in the six months ended June 30, 2022.

Income Taxes. Provision for income taxes decreased $13.2 million, or 38%, to $21.6 million for the six months ended June 30, 2023 from $34.8 million for the six months ended June 30, 2022. The decrease reflected a $13.0 million tax benefit related to tax refunds receivable and changes to state tax apportionment calculations.

During the three months ended June 30, 2023, the Company received an advisory letter that it requested from the State of Indiana related to certain state tax apportionment provisions in the Indiana Financial Institution Tax Code and Regulations. The advisory letter provided guidance related to the methodology used to determine and source the receipts in the state of Indiana for the Company’s mortgage origination and warehousing service lines. In effect, the guidance provided the Company the ability to revise its state income tax apportionment calculation to reduce its Indiana tax and related deferred tax liabilities. As such, the Company will amend several of its state returns and request the respective refunds. In anticipation of the refunds, a receivable was established as of June 30, 2023. On July 21, 2023, the company received a final revenue ruling from the Indiana Department of Revenue supporting the revised methodology. Additionally, the change in methodology is expected to result in a 1.0% to 1.5% reduction in the Company’s overall effective tax rate in the future.

The effective tax rate was 15.2% for the six months ended June 30, 2023 and 25.1% for the six months ended June 30, 2022.

Our Segments

We operate in three primary segments: Multi-Family Mortgage Banking, Mortgage Warehousing, and Banking. The reportable segments are consistent with the internal reporting and evaluation of the principal lines of business of the

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Company. The Multi-family Mortgage Banking segment originates and services government sponsored mortgages for multi-family and healthcare facilities. It is also a fully integrated syndicator of low-income housing tax credit and debt funds. As one of the top ranked agency lenders in the nation, our licenses with Fannie Mae, Freddie Mac, and FHA, coupled with our bank financing products, provide sponsors custom beginning-to-end financing solutions that adapt to an ever-changing market. We are also one of the largest GNMA servicers in the country based on aggregate loan principal value. As of June 30, 2023 the Company’s total servicing portfolio had an unpaid principal balance of $23.5 billion, primarily managed in the Multi-Family Mortgage Banking segment. Included in this amount was an unpaid principal balance of loans serviced for others of $13.8 billion, an unpaid principal balance of loans sub-serviced for others of $2.1 billion, and other servicing balances of $0.7 billion at June 30, 2023. These loans are not included in the accompanying balance sheets. The Company also manages $7.0 billion of loans for customers that have loans on the balance sheet at June 30, 2023. The servicing portfolio is primarily GNMA, Fannie Mae, and Freddie Mac loans 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 $78 billion in 2021, $33.2 billion in 2022, and $13.8 billion for the six months ended June 30, 2023. Mortgage Warehousing also provides commercial loans secured by GNMA, Fannie Mae, and Freddie Mac servicing rights and collects deposits related to the mortgage escrow accounts of its customers. Merchants was recently ranked as the third largest producer of warehouse commitments by Inside Mortgage Finance.

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.

Our segments diversify the net income of Merchants Bank and provide synergies across the segments. The strategic opportunities include that MCC loans are funded by Merchants 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. MCC also provides leads to Merchants Bank for core deposit opportunities. Retail 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 June 30, 2023 and 2022, we had total net income of $65.3 million and $53.9 million, respectively. For the six months ended June 30, 2023 and 2022, we had total net income of $120.3 million and $104.1 million, respectively. Net income for our three segments for the respective periods was as follows:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022

	(In thousands)
Multi-family Mortgage Banking	$	11,242	$	19,556	$	13,208	$	31,048
Mortgage Warehousing		18,596		11,868		27,237		25,027
Banking		42,650		25,932		91,957		54,696
Other		(7,186)		(3,421)		(12,145)		(6,694)

Total	$	65,302	$	53,935	$	120,257	$	104,077

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Multi-family Mortgage Banking.

Comparison of results for the three months ended June 30, 2023 and 2022:

The Multi-family Mortgage Banking segment reported net income of $11.2 million for the three months ended June 30, 2023, a decrease of $8.3 million, or 43%, compared to the three months ended June 30, 2022. The decrease was primarily due to a $19.2 decrease in gain on sale of loans, partially offset by a $6.8 million decrease in the provision for income tax that reflected a tax benefit for tax refunds receivable and changes to state tax apportionment calculations.

Also included in the results was a $2.4 million increase in syndication and asset management fees that was partially offset by a $50,000 decrease in loan servicing fees that reflected higher underlying growth offset by lower positive fair market value adjustments. The decrease in loan servicing fees reflected a positive fair market value adjustment of $2.1 million on servicing rights for the three months ended June 30, 2023 compared to a positive fair market value adjustment of $6.6 million for the three months ended June 30, 2022.

The volume of loans originated and acquired for sale in the secondary market increased by $261.8 million, or 64%, to $668.2 million, for the three months ended June 30, 2023, compared to $406.4 million for the three months ended June 30, 2022.

Comparison of results for the six months ended June 30, 2023 and 2022:

The Multi-family Mortgage Banking segment reported net income of $13.2 million for the six months ended June 30, 2023, a decrease of $17.8 million, or 57%, from the $31.0 million of net income reported for the six months ended June 30, 2022. The decrease was primarily due to a $34.7 million decrease in noninterest income, including a $32.1 million decrease in gain on sale of loans and a $1.3 million decrease in loan servicing fees. The decrease in loan servicing fees reflected a negative fair market value adjustment of $0.1 million on servicing rights for the six months ended June 30, 2023 compared to a positive fair market value adjustment of $9.9 million for the six months ended June 30, 2022.

The lower noninterest income was partially offset by a $10.1 million decrease in the provision for income tax that was associated with a tax benefit for tax refunds receivable and changes to state tax apportionment calculations, as well as lower commission expenses associated with lower gain on sale for the six months ended June 30, 2023.

The volume of loans originated and acquired for sale in the secondary market decreased by $165.7 million, or 17%, to $782.3 million, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Mortgage Warehousing. ��

Comparison of results for the three months ended June 30, 2023 and 2022:

The Mortgage Warehousing segment reported net income of $18.6 million for the three months ended June 30, 2023, an increase of $6.7 million, or 57%, compared to the three months ended June 30, 2022. The higher net income reflected a $41.0 million increase in interest income primarily from higher yields and volumes on revolving lines of credit that are collateralized by mortgage servicing rights, as well as a decrease of $4.3 million in the provision for income tax that included a tax benefit for tax refunds receivable and changes to state tax apportionment calculations. Mortgage warehouse fees also increased by $1.5 million. These increases to net income were partially offset by a $37.4 million increase in interest expenses that reflected higher costs of deposits, a $1.5 million increase in the provision for credit losses, and a $0.8 million increase in deposit insurance expenses.

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There was a 5% decrease in warehouse loan volume of $8.4 billion compared to $8.8 billion for the three months ended June 30, 2022, which compared to an industry volume decrease of 32%, according to the Mortgage Bankers Association.

Comparison of results for the six months ended June 30, 2023 and 2022:

The Mortgage Warehousing segment reported net income for the six months ended June 30, 2023 of $27.2 million, an increase of $2.2 million, or 9%, over the $25.0 million reported for the six months ended June 30, 2022. The higher net income was primarily due to a $63.0 million increase in interest income associated with higher yields and volume on revolving lines of credit that are collateralized by mortgage servicing rights, as well as a decrease of $5.7 million in the provision for income tax that reflected a tax benefit for tax refunds receivable and changes to state tax apportionment calculations. Mortgage warehouse fees also increased by $0.7 million. These increases to net income were partially offset by a $63.2 million increase in interest expenses that reflected higher costs of deposits, a $3.1 million increase in the provision for credit losses, and a $1.1 million increase in deposit insurance expenses.

There was a 24% decrease in warehouse loan volume of $13.8 billion compared to $18.2 billion for the six months ended June 30, 2022, which compared to an industry volume decrease of 42%, according to the Mortgage Bankers Association.

Banking.

Comparison of results for the three months ended June 30, 2023 and 2022:

The Banking segment reported net income of $42.7 million for the three months ended June 30, 2023, an increase of $16.7 million, or 64%, compared to the three months ended June 30, 2022. The increase was primarily due to a $28.6 million increase in net interest income, a $9.0 million increase in gain on sale of loans, and a $4.2 million decrease in the provision for income taxes, partially offset by a $16.1 million increase in the provision for credit losses and a $5.4 million increase in salaries and employee benefits.

Noninterest income for the three months ended June 30, 2023 included a positive fair market value adjustment of $1.3 million on single-family servicing rights, compared to a positive fair market value adjustment of $1.2 million for the three months ended June 30, 2022.

Comparison of results for the six months ended June 30, 2023 and 2022:

The Banking segment reported net income of $92.0 million for the six months ended June 30, 2023, an increase of $37.3 million, or 68%, compared to $54.7 million for the six months ended June 30, 2022. The increase was primarily due to a $65.5 million increase in net interest income and a $10.7 million increase in gain on sale of loans, partially offset by an $18.9 million increase in the provision for credit losses, a $7.8 million increase in salaries and employee benefits, a $5.1 million decrease in loan servicing fees, and a $3.5 million increase in deposit insurance expense that, reflected growth in assets and deposits.

Noninterest income for the six months ended June 30, 2023 included a positive fair market value adjustment of $0.6 million on single-family servicing rights, compared to a positive fair market value adjustment of $5.5 million for the six months ended June 30, 2022.

Liquidity and Capital Resources

Liquidity.

Our primary sources of funds are business and consumer deposits, escrow and custodial deposits, brokered deposits, borrowings, principal and interest payments on loans, and proceeds from sale of loans. While maturities and scheduled

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amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition.

At June 30, 2023, based on available collateral, we had $5.3 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. While the amounts available fluctuate daily, we also had available capacity in credit lines through our membership in the AFX. This liquidity enhances the ability to effectively manage interest expense and asset levels in the future.

The Company’s most liquid assets are in cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable. Taken together with its unused borrowing capacity of $5.3 billion described below, these totaled $10.2 billion, or 64%, of its $15.9 billion total assets at June 30, 2023. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our liquid assets and borrowing capacity significantly exceed our uninsured deposits. Uninsured deposits totaled approximately $2 billion as of June 30, 2023, representing less than 20% of total deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.7 billion as of June 30, 2023.

The Company’s investment portfolio has minimal levels of unrealized losses and management does not anticipate a need to sell securities for liquidity purposes at a loss. We are able to maintain minimal levels of investment securities because of our originate to sell model, which provides ongoing liquidity. As of June 30, 2023, Accumulated Other Comprehensive Losses (“AOCL”) of $7.0 million losses, related to securities available for sale, decreased $3.5 million, or 33%, compared to losses of $10.5 million as of December 31, 2022. The $7.0 million loss in AOCL as of June 30, 2023 represented less than 1% of total equity and 1% of total securities available for sale.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash (used in) provided by operating activities was $(543.0) million and $874.8 million for the six months ended June 30, 2023 and 2022, respectively. Net cash (used in) investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities and loans, was $(2.4) billion and $(1.4) billion for the six months ended June 30, 2023 and 2022, respectively. Net cash provided by (used in) financing activities, which is comprised primarily of net change in borrowings and deposits was $3.1 billion and $(297.4) million for the six months ended June 30, 2023 and 2022, respectively.

At June 30, 2023 we had $3.5 billion in outstanding commitments to extend credit that are subject to credit risk and $3.7 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.

Certificates of deposit that are scheduled to mature in less than one year from June 30, 2023 totaled $5.0 billion, or 97%, of total certificates of deposit. 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 discount window, brokered deposits, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit.

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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 shelf registration statement on Form S-3 with the SEC on August 8, 2022, which was declared effective on August 17, 2022, under which we can issue up to $500 million aggregate offering amount of registered securities to finance our growth objectives. As previously demonstrated, the Company also has the ability to utilize securitization transactions to free up capital as needed.

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 $1.6 billion as of June 30, 2023, compared to $1.5 billion as of December 31, 2022. The $100.6 million increase resulted primarily from net income of $120.3 million, which was partially offset by dividends paid on common and preferred shares of $24.3 million during the period.

7% Series A 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 were to accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 460.5 basis points per year. However, the terms of the Series A Preferred Stock permit us to replace three-month LIBOR if we determine that LIBOR has been discontinued or is no longer viewed as an acceptable benchmark for similar securities. With the cessation of published three-month LIBOR rates as of June 30, 2023, the Company has determined that three-month LIBOR has been discontinued and is no longer an acceptable benchmark. The Company anticipates replacing three-month LIBOR with Federal Reserve’s three month Secured Overnight Financing Rate (“SOFR”). The Company believes that three-month SOFR represents the most comparable replacement benchmark, is an industry-accepted substitute, and is consistent with expectations of investors in securities similar to the Series A Preferred Stock. In addition to replacing three-month LIBOR with three-month SOFR, the terms of the Series A Preferred Stock permit us to adjust the spread to ensure that the payable floating rate remains comparable. Therefore, the Company anticipates increasing the spread by 26.2 basis points, which is consistent with industry practice and the recommendation of the Federal Reserve’s Alternative Reference Rates Committee, resulting in the Company paying a floating rate of three-month SOFR plus a spread of 486.7 basis points during the floating rate period. The Company may also redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024.

6% Series B Preferred Stock. In August 2019 the Company issued 5,000,000 depositary shares, each representing a 1/40^th 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

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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 share (equivalent to $1.50 per depositary share) through September 30, 2024. After such date, quarterly dividends were to accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 456.9 basis points per year. However, the terms of the Series B Preferred Stock permit us to replace three-month LIBOR if we determine that LIBOR has been discontinued or is no longer viewed as an acceptable benchmark for similar securities. With the cessation of published three-month LIBOR rates as of June 30, 2023, the Company has determined that three-month LIBOR has been discontinued and is no longer an acceptable benchmark. The Company anticipates replacing three-month LIBOR with Federal Reserve’s three month Secured Overnight Financing Rate (“SOFR”). The Company believes that three-month SOFR represents the most comparable replacement benchmark, is an industry-accepted substitute, and is consistent with expectations of investors in securities similar to the Series B Preferred Stock. In addition to replacing three-month LIBOR with three-month SOFR, the terms of the Series B Preferred Stock permit us to adjust the spread to ensure that the payable floating rate remains comparable. Therefore, the Company anticipates increasing the spread by 26.2 basis points, which is consistent with industry practice and the recommendation of the Federal Reserve’s Alternative Reference Rates Committee, resulting in the Company paying a floating rate of three-month SOFR plus a spread of 483.1 basis points during the floating rate period. The Company may also redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024.

6% Series C Preferred Stock. On March 23, 2021, the Company issued 6,000,000 depositary shares, each representing a 1/40^th interest in a share of its 6.00% Fixed Rate Series C Non-Cumulative Perpetual Preferred Stock, without par value (the “Series C 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 $150.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $5.1 million paid to third parties, the Company received total net proceeds of $144.9 million.

On May 6, 2021, our previously issued, 8% preferred shareholders participated in a private offering to replace their redeemed 8% preferred shares with the Company’s 6% Series C preferred stock. Accordingly, 46,181 shares (1,847,233 depositary shares) of the Company’s 6% Series C preferred stock were issued at a price of $25 per depositary share. The total capital raised from the private offering was $46.2 million, net of $23,000 in expenses.

Dividends on the Series C Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series C Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after April 1, 2026, 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.

8.25% Series D Preferred Stock. On September 27, 2022, the Company issued 5,200,000 depositary shares, each representing a 1/40^th interest in a share of its 8.25% Fixed Rate Series D Non-Cumulative Perpetual Preferred Stock, without par value (the “Series D 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 $130.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.6 million paid to third parties, the Company received total net proceeds of $125.4 million. On September 30, 2022, the Company issued an additional 500,000 shares of Series D Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement, resulting in an additional $12.1 million in net proceeds, after deducting $0.4 million in underwriting discounts.

Dividends on the Series D Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series D Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after October 1, 2027, subject to the approval of the appropriate federal banking agency, at the liquidation

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preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.

Common Shares/Dividends. As of June 30, 2023, the Company had 43,237,300 common shares issued and outstanding. The Board expects to declare a quarterly dividend of $0.08 per share in each quarter of 2023.

Capital Adequacy.

The following tables present the Company’s capital ratios at June 30, 2023 and December 31, 2022:


					Minimum				Minimum
					Amount Required				Amount To Be
					for Adequately				Well
	Actual				Capitalized⁽¹⁾				Capitalized⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
June 30, 2023
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,625,223	11.3	%	$	1,148,948	8.0	%	$	—	N/A	%
Merchants Bank		1,563,433	11.1	%		1,127,989	8.0	%		1,409,986	10.0
FMBI		37,536	11.3	%		26,636	8.0	%		33,295	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,549,763	10.8	%		861,711	6.0	%		—	N/A	%
Merchants Bank		1,488,730	10.6	%		845,992	6.0	%		1,127,989	8.0
FMBI		36,779	11.0	%		19,977	6.0	%		26,636	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,050,155	7.3	%		646,284	4.5	%		—	N/A	%
Merchants Bank		1,488,730	10.6	%		634,494	4.5	%		916,491	6.5
FMBI		36,779	11.0	%		14,983	4.5	%		21,642	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,549,763	10.6	%		586,227	4.0	%		—	N/A	%
Merchants Bank		1,488,730	10.4	%		574,725	4.0	%		718,406	5.0
FMBI		36,779	10.6	%		13,823	4.0	%		17,279	5.0	%

(1)

As defined by regulatory agencies.

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					Minimum				Minimum
					Amount Required				Amount To Be
					for Adequately				Well
	Actual				Capitalized⁽¹⁾				Capitalized⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
December 31, 2022
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,507,968	12.2	%	$	992,883	8.0	%	$	—	N/A	%
Merchants Bank		1,427,738	11.7	%		975,853	8.0	%		1,219,817	10.0	%
FMBI		34,769	11.3	%		24,703	8.0	%		30,878	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,452,456	11.7	%		744,662	6.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		731,890	6.0	%		975,853	8.0	%
FMBI		34,054	11.0	%		18,527	6.0	%		24,703	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		952,848	7.7	%		558,497	4.5	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		548,917	4.5	%		792,881	6.5	%
FMBI		34,054	11.0	%		13,895	4.5	%		20,071	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,452,456	11.7	%		497,604	4.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		487,511	4.0	%		609,389	5.0	%
FMBI		34,054	10.7	%		12,702	4.0	%		15,878	5.0	%

(1)

As defined by regulatory agencies.

Quantitative measures established by regulation to ensure capital adequacy require the Company, Merchants Bank, and FMBI to maintain minimum amounts and ratios. Management believes, as of June 30, 2023 and December 31, 2022, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject.

As of June 30, 2023 and December 31, 2022, the most recent notifications from the Federal Reserve categorized the Company as well capitalized and most recent notifications from the FDIC categorized Merchants Bank and FMBI as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s, Merchants Bank’s, or FMBI’s category.

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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

Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries or SOFR.

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.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

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 and excludes non-interest income. 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

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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 June 30, 2023 and December 31, 2022.


	Net Interest Income Sensitivity
	Twelve Months Forward
	- 200			- 100			+ 100			+ 200

	(Dollars in thousands)
June 30, 2023:
Dollar change	$	(93,023)		$	(46,622)		$	32,156		$	60,629
Percent change		(21.0)	%		(10.5)	%		7.3	%		13.7	%

December 31, 2022:
Dollar change	$	(96,861)		$	(48,581)		$	37,232		$	74,094
Percent change		(23.8)	%		(11.9)	%		9.2	%		18.2	%

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 June 30, 2023 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)
June 30, 2023:
Dollar change	$	1,101		$	1,024		$	(3,703)		$	(23,514)
Percent change		0.1	%		0.1	%		(0.3)	%		(1.6)	%

December 31, 2022:
Dollar change	$	22,855		$	11,640		$	(10,925)		$	(26,385)
Percent change		1.6	%		0.8	%		(0.8)	%		(1.9)	%

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 June 30, 2023 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.”

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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 June 30, 2023, 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.

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Part II

Other Information

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

There have been no material changes from 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, 2022.

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.

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ITEM 6. Exhibits


Exhibit
Number		Description

3.1		Second Amended and Restated Articles of Incorporation of Merchants Bancorp. (incorporated by reference to Exhibit 3.1 of Form 8-K, filed on May 24, 2022).

3.2		Articles of Amendment to the Second Amended and Restated Articles of Incorporation dated September 27, 2022 designating the 8.25% Fixed Rate Reset Series D Non-Cumulative Perpetual Preferred Stock (incorporated by reference to Exhibit 3.2 of Form 8-A filed on September 27, 2022).

3.3		Second Amended and Restated By-Laws of Merchants Bancorp (incorporated by reference to Exhibit 3.1 of Form 8-K, filed on November 20, 2017).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

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101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

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101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

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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.


			Merchants Bancorp

Date:	August 9, 2023	By:	/s/ Michael F. Petrie
			Michael F. Petrie
			Chairman & Chief Executive Officer



Date:	August 9, 2023	By:	/s/ John F. Macke
			John F. Macke Chief Financial Officer
			(Principal Financial & Accounting Officer)

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Merchants Bancorp (MBIN) 10-Q2023 Q2 Quarterly report

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