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What changed in Merchants Bancorp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Merchants Bancorp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+443 added−421 removedSource: 10-K (2024-03-12) vs 10-K (2023-03-16)

Top changes in Merchants Bancorp's 2023 10-K

443 paragraphs added · 421 removed · 332 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

86 edited+13 added−7 removed87 unchanged
Biggest changeA number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including 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; • 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 mortgage origination, sale and servicing operations; • our ability to identify and mitigate cybersecurity 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; 16 Table of Contents • 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 • changes in federal tax law or policy.
Biggest changeA number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: • business and economic conditions, particularly those affecting the financial services industry and our primary market areas; 16 Table of Contents • 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; • 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; • compliance with governmental and regulatory requirements, 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 cybersecurity 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; • 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 • changes in federal tax law or policy.
Consumer Laws Merchants Bank and FMBI must comply with a number of federal consumer protection laws, including, among others: • the Gramm-Leach-Bliley Act, which requires a bank to maintain privacy with respect to certain consumer data in its possession and to periodically communicate with consumers on privacy matters; • the Right to Financial Privacy Act, which imposed a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; • the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications; • the Truth in Lending Act and Regulation Z thereunder, which requires certain disclosures to consumer borrowers regarding the terms of their loans; • the Fair Credit Reporting Act, which regulates the use and reporting of information related to the credit history of consumers; • the Equal Credit Opportunity Act and Regulation B thereunder, which prohibits discrimination on the basis of age, race and certain other characteristics, in the extension of credit; • the Homeowners Equity Protection Act, which requires, among other things, the cancellation of mortgage insurance once certain equity levels are reached; • the Home Mortgage Disclosure Act and Regulation C thereunder, which require mortgage lenders to report certain public loan data; • the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics; • the Real Estate Settlement Procedures Act and Regulation X thereunder, which imposes conditions on the consummation and servicing of mortgage loans; • the Truth in Savings Act and Regulation DD thereunder, which requires certain disclosures to depositors concerning the terms of their deposit accounts; and 15 Table of Contents • the Electronic Funds Transfer Act and Regulation E thereunder, which governs various forms of electronic banking.
Consumer Laws Merchants Bank must comply with a number of federal consumer protection laws, including, among others: • the Gramm-Leach-Bliley Act, which requires a bank to maintain privacy with respect to certain consumer data in its possession and to periodically communicate with consumers on privacy matters; • the Right to Financial Privacy Act, which imposed a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; • the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications; • the Truth in Lending Act and Regulation Z thereunder, which requires certain disclosures to consumer borrowers regarding the terms of their loans; 15 Table of Contents • the Fair Credit Reporting Act, which regulates the use and reporting of information related to the credit history of consumers; • the Equal Credit Opportunity Act and Regulation B thereunder, which prohibits discrimination on the basis of age, race and certain other characteristics, in the extension of credit; • the Homeowners Equity Protection Act, which requires, among other things, the cancellation of mortgage insurance once certain equity levels are reached; • the Home Mortgage Disclosure Act and Regulation C thereunder, which require mortgage lenders to report certain public loan data; • the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics; • the Real Estate Settlement Procedures Act and Regulation X thereunder, which imposes conditions on the consummation and servicing of mortgage loans; • the Truth in Savings Act and Regulation DD thereunder, which requires certain disclosures to depositors concerning the terms of their deposit accounts; and • the Electronic Funds Transfer Act and Regulation E thereunder, which governs various forms of electronic banking.
In particular, and among other things, the Dodd-Frank Act: (i) created a Financial Stability Oversight Council as part of a regulatory structure for identifying emerging systemic risks and improving interagency cooperation; (ii) created the CFPB, which is authorized to regulate providers of consumer credit, savings, payment and other consumer financial products and services; (iii) narrowed the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations and expanded the authority of state attorneys general to bring actions to enforce federal consumer protection legislation; (iv) imposed more stringent capital requirements on bank holding companies and subjected certain activities, including interstate mergers and acquisitions, to heightened capital conditions; (v) with respect to mortgage lending, (a) significantly expanded requirements applicable to loans secured by 1-4 family residential real property, (b) imposed strict rules on mortgage servicing, and (c) required the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards; (vi) repealed the prohibition on the payment of interest on business checking accounts; (vii) restricted the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater; (viii) in the so-called “Volcker Rule,” subject to numerous exceptions, prohibited depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading; (ix) provided for enhanced regulation of advisers to private funds and of the derivatives markets; (x) enhanced oversight of credit rating agencies; and (xi) prohibited banking agency requirements tied to credit ratings.
In particular, and among other things, the Dodd-Frank Act: (i) created a Financial Stability Oversight Council as part of a regulatory structure for identifying emerging systemic risks and improving interagency cooperation; (ii) created the CFPB, which is authorized to regulate providers of consumer credit, savings, payment and other consumer financial products and services; (iii) narrowed the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations and expanded the authority of state attorneys general to bring actions to enforce federal consumer protection legislation; (iv) imposed more stringent capital requirements on bank holding companies and subjected certain activities, including interstate mergers and acquisitions, to heightened capital conditions; (v) with respect to mortgage lending, (a) significantly expanded requirements applicable to loans secured by 1-4 family residential real property, (b) imposed strict rules on mortgage servicing, and (c) required the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards; (vi) repealed the prohibition on the payment of interest on business checking accounts; (vii) restricted the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater; (viii) in the so-called “Volcker Rule,” subject to numerous exceptions, prohibited depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading; (ix) provided for enhanced regulation of advisers to private funds and of the derivatives 13 Table of Contents markets; (x) enhanced oversight of credit rating agencies; and (xi) prohibited banking agency requirements tied to credit ratings.
Consistently 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 an approved United States Department of Agriculture (“USDA”) Rural Housing 538 lender.
Consistently one of the top ranked agency lenders in the nation, our licenses with FHA and affordable Fannie Mae and Freddie Mac, coupled with our bank financing products, provide sponsors custom beginning-to-end financing solutions that adapt to an ever-changing market. We are also an approved United States Department of Agriculture (“USDA”) Rural Housing 538 lender.
This statute and regulation often interact with Regulation CC of the Federal Reserve Board, which governs the settlement of checks and other payment system issues. Future Legislation and Executive Orders In addition to the specific legislation described above, the new administration may sign executive orders or memoranda that could directly impact the regulation of the banking industry.
This statute and regulation often interact with Regulation CC of the Federal Reserve Board, which governs the settlement of checks and other payment system issues. Future Legislation and Executive Orders In addition to the specific legislation described above, the administration may sign executive orders or memoranda that could directly impact the regulation of the banking industry.
The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision. Merchants Bancorp Bank Holding Company Act of 1956, as amended We, as the sole shareholder of Merchants Bank and FMBI, are a bank holding company (“BHC”) within the meaning of the Bank Holding Company Act of 1956, as amended (“BHC Act”).
The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision. Merchants Bancorp Bank Holding Company Act of 1956, as amended We, as the sole shareholder of Merchants Bank are a bank holding company (“BHC”) within the meaning of the Bank Holding Company Act of 1956, as amended (“BHC Act”).
Commercial Lending and Retail Banking Merchants Bank holds loans in its portfolio comprised of multi-family construction and bridge loans referred by MCC, owner occupied commercial real estate loans, commercial and industrial loans, agricultural loans, residential mortgage loans and consumer loans.
Commercial Lending and Retail Banking Merchants Bank holds loans in its portfolio comprised of multi-family and healthcare bridge loans and multi-family construction loans referred by MCC, owner occupied commercial real estate loans, commercial and industrial loans, agricultural loans, residential mortgage loans and consumer loans.
The foundation of our culture is our approach to employee engagement, diversity, equity and inclusion (“DEI”). We embrace diversity and inclusion, which we believe fosters creativity, innovation and thought leadership through the infusion of new ideas and perspectives.
A foundation of our culture is our approach to employee engagement, diversity, equity and inclusion (“DEI”). We embrace diversity and inclusion, which we believe fosters creativity, innovation and thought leadership through the infusion of new ideas and perspectives.
In addition, banks must have procedures to verify the identity of their customers. Merchants Bank and FMBI established an anti-money laundering program pursuant to the BSA and a customer identification program pursuant to the Patriot Act.
In addition, banks must have procedures to verify the identity of their customers. Merchants Bank established an anti-money laundering program pursuant to the BSA and a customer identification program pursuant to the Patriot Act.
We have primarily grown organically and strategically built our business in a way that we believe offers insulation from cyclical economic and credit swings and provides synergies across our lines of business.
We have primarily grown organically and strategically built our business model in a way that we believe offers insulation from cyclical economic and credit swings and provides synergies across our lines of business.
However, on November 21, 2017, the Federal Reserve, Office of the Comptroller of the Currency (“OCC”), and FDIC finalized a joint proposal and adopted a final rule (the “Transitions Rule”) pursuant to which the current regulatory capital treatment then in place for servicing rights, certain temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions was indefinitely extended in anticipation of a subsequent notice of proposed rulemaking by such regulators to simplify the regulatory capital treatment of such items (the “Simplification Rule”).
However, on November 21, 2017, the Federal Reserve, Office of the Comptroller of the Currency (“OCC”), and FDIC finalized a joint proposal and adopted a final rule (the “Transitions Rule”) pursuant to which the current regulatory capital treatment then in place for servicing rights, certain temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions was indefinitely extended in anticipation of a subsequent notice of proposed rulemaking by such regulators to simplify the regulatory capital treatment of such items 11 Table of Contents (the “Simplification Rule”).
Agricultural Lending Merchants Bank’s Lynn and Richmond, Indiana offices primarily offer agricultural loans within its designated Community Reinvestment Act (“CRA”) assessment area of Randolph and Wayne counties in Eastern Indiana and nearby Darke County, Ohio. FMBI primarily provides agricultural loans within its designated CRA assessment area of Mercer County in Western Illinois and Ford County in East Central Illinois.
Agricultural Lending Merchants Bank’s Lynn and Richmond, Indiana offices primarily offer agricultural loans within its designated Community Reinvestment Act (“CRA”) assessment area of Randolph and Wayne counties in Eastern Indiana and nearby Darke County, Ohio. FMBI primarily provided agricultural loans within its designated CRA assessment area of Mercer County in Western Illinois and Ford County in East Central Illinois.
Although the rules contain certain standards applicable only to large, internationally active banks, many of them apply to all banking organizations, including us, Merchants Bank, and FMBI. The institutions and companies subject to the rules are referred to collectively herein as “covered” banking organizations.
Although the rules contain certain standards applicable only to large, internationally active banks, many of them apply to all banking organizations, including Merchants Bank. The institutions and companies subject to the rules are referred to collectively herein as “covered” banking organizations.
Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on Merchants Bank and FMBI. The Company is currently operating under an approved CRA strategic plan. The Dodd-Frank Wall Street Reform and Consumer Protection Act On July 21, 2010, the Dodd-Frank Act was signed into law.
Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on Merchants Bank. The Company is currently operating under an approved CRA strategic plan through 2025. The Dodd-Frank Wall Street Reform and Consumer Protection Act On July 21, 2010, the Dodd-Frank Act was signed into law.
They also impact a bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, banks are required to implement a comprehensive information security program that includes administrative, technical, and physical 13 Table of Contents safeguards to ensure the security and confidentiality of customer records and information.
They also impact a bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, banks are required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information.
As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Indiana Department of Financial Institutions (“IDFI”), Illinois Department of Financial and Professional Regulation (“IDFPR”), Board of Governors of the Federal Reserve System (“Federal Reserve”), Federal Deposit Insurance Corporation (“FDIC”), and Consumer Financial Protection Bureau (“CFPB”).
As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Indiana Department of Financial Institutions (“IDFI”), Board of Governors of the Federal Reserve System (“Federal Reserve”), Federal Deposit Insurance Corporation (“FDIC”), and Consumer Financial Protection Bureau (“CFPB”).
Act requires residential mortgage loan originators who are employees of regulated financial institutions to register with the Nationwide Mortgage Licensing System and Registry, a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states. The S.A.F.E.
Act requires residential mortgage loan originators who are employees of regulated financial institutions to register with the Nationwide Mortgage Licensing System and Registry, a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators 14 Table of Contents by the states. The S.A.F.E.
We have not elected, and presently do not intend to elect, to be treated as a financial holding company. Support of Subsidiary Institutions The Federal Reserve has issued regulations under the BHC Act requiring a BHC to serve as a source of financial and managerial strength to its subsidiary banks.
We have not elected, and presently do not intend to elect, to be treated as a financial holding company. 9 Table of Contents Support of Subsidiary Institutions The Federal Reserve has issued regulations under the BHC Act requiring a BHC to serve as a source of financial and managerial strength to its subsidiary banks.
The information contained on our website is not a part of, or incorporated by reference into, this report. SUPERVISION AND REGULATION General Insured banks, their holding companies and their affiliates are extensively regulated under federal and state law.
The information contained on our website is not a part of, or incorporated by reference into, this report. 7 Table of Contents SUPERVISION AND REGULATION General Insured banks, their holding companies and their affiliates are extensively regulated under federal and state law.
To further demonstrate our ESG commitment to sustainable cities and communities, MCC has acquired private equity interests in affordable housing projects that generate low-income housing tax credits through its tax credit equity funds. The affordable housing projects target low-income individuals.
To further demonstrate our ESG commitment to sustainable cities and communities, Merchants Bank has acquired private equity interests in affordable housing projects that generate low-income housing tax credits through its tax credit equity funds. The affordable housing projects target low-income individuals.
Department of the Treasury (the “Treasury”) and mortgage related rules, including with respect to loan 7 Table of Contents securitization and servicing by HUD and agencies such as Ginnie Mae, Fannie Mae, and Freddie Mac, have an impact on our business.
Department of the Treasury (the “Treasury”) and mortgage related rules, including with respect to loan securitization and servicing by HUD and agencies such as Ginnie Mae, Fannie Mae, and Freddie Mac, have an impact on our business.
The bank’s BHC is required to guarantee that the bank will comply with the plan and provide appropriate assurances of 10 Table of Contents performance. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
The bank’s BHC is required to guarantee that the bank will comply with the plan and provide appropriate assurances of performance. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
In addition to dividend limitations, Merchants Bank and FMBI are subject to certain restrictions on extensions of credit to us, on investments in our shares or other securities and in taking such shares or securities as collateral for loans.
In addition to dividend limitations, Merchants Bank is subject to certain restrictions on extensions of credit to us, on investments in our shares or other securities and in taking such shares or securities as collateral for loans.
Privacy and Cybersecurity Merchants Bank and FMBI are subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers.
Privacy and Cybersecurity Merchants Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers.
If the Company elects to repurchase or redeem its equity securities, it will generally incur a 1% excise tax on the fair market value of any stock of the corporation that is repurchased beginning after December 31, 2022, as required in the Inflation Reduction Act of 2022.
If the Company elects to repurchase or redeem its equity securities, it will generally incur a 1% excise tax on the fair market value of any stock of the corporation that is repurchased, as required in the Inflation Reduction Act of 2022.
Our Business Segments We have several lines of business and provide various banking and financial services through our subsidiaries. Our business segments are defined as multi-family mortgage banking, mortgage warehousing, and banking. Multi-Family Mortgage Banking ​ Merchants Capital Corp.
Our Business Segments We have several lines of business and provide various banking and financial services through our subsidiaries. Our business segments are defined as multi-family mortgage banking, mortgage warehousing, and banking. 3 Table of Contents Multi-Family Mortgage Banking ​ Merchants Capital Corp.
The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, 9 Table of Contents Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal Reserve.
The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal Reserve.
For example, a bank is generally prohibited from 12 Table of Contents making any capital distribution (including payment of a dividend) to its BHC if the distribution would cause the bank to become undercapitalized.
For example, a bank is generally prohibited from making any capital distribution (including payment of a dividend) to its BHC if the distribution would cause the bank to become undercapitalized.
The CFPB has examination and enforcement authority over insured depository institutions and their holding companies that have more than $10 billion in assets for at least four consecutive quarters. Merchants Bank and FMBI had three consecutive quarters during 2022.
The CFPB has examination and enforcement authority over insured depository institutions and their holding companies that have more than $10 billion in assets for at least four consecutive quarters. Merchants Bank had four consecutive quarters during 2023.
Congress is also considering legislation to reform certain government sponsored entities (“GSEs”) (e.g., Fannie Mae, Freddie Mac, and Ginnie Mae), including ending the federal government’s conservatorship of Fannie Mae and Freddie Mac.
Congress is also considering legislation to reform certain government sponsored entities (“GSEs”), including ending the federal government’s conservatorship of Fannie Mae and Freddie Mac.
Additionally, in order to reward employees for their contributions towards our success and to help ensure that our employees are more aligned with our shareholders, in 2020 we established an Employee Stock Ownership Plan (“ESOP”).
Additionally, in order to reward employees for their contributions towards our success and to help ensure that our employees are more aligned with our 6 Table of Contents shareholders, in 2020 we established an Employee Stock Ownership Plan (“ESOP”).
Merchants Bank and FMBI offer operating lines of credit for crop and livestock production, intermediate term financing to purchase agricultural equipment and breeding livestock and long-term financing to purchase agricultural real estate.
Merchants Bank offers operating lines of credit for crop and livestock production, intermediate term financing to purchase agricultural equipment and breeding livestock and long-term financing to purchase agricultural real estate.
Other originations that are referred to the Banking segment including bridge financing products to refinance, acquire, or reposition multi-family housing projects, as well construction lending for market rate and affordable housing developments. In some environments, these originations referred to in the Banking segment can represent a significant portion of the Multi-Family Mortgage Banking total origination volume.
Other originations that are referred to the Banking segment including bridge financing products to refinance, acquire, or reposition multi-family housing projects, construction lending for market rate and affordable housing developments, and financing of need-based healthcare facilities. In some environments, these originations referred to in the Banking segment can represent a significant portion of the Multi-Family Mortgage Banking total origination volume.
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.
We believe that the combination of net interest income based on short duration assets and liabilities 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.
Through this segment we also serve as a syndicator of 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”), and traditional community banking.
We currently operate in multiple business segments, including Multi-family Mortgage Banking that offers multi-family housing and healthcare facility financing and servicing (through this segment we also serve as a syndicator of 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.
Merchants Bank and FMBI also maintain records of cash purchases of negotiable instruments, file reports of certain cash transactions exceeding $10,000 (daily aggregate amount), and report suspicious activity that might signify money laundering, tax evasion, or other criminal activities pursuant to the BSA. Merchants Bank and FMBI otherwise have implemented policies and procedures to comply with the foregoing requirements.
Merchants Bank also maintains records of cash purchases of 10 Table of Contents negotiable instruments, file reports of certain cash transactions exceeding $10,000 (daily aggregate amount), and report suspicious activity that might signify money laundering, tax evasion, or other criminal activities pursuant to the BSA. Merchants Bank otherwise has implemented policies and procedures to comply with the foregoing requirements.
Merchants Bank currently has warehouse lines of credit, loan participations, operating lines of credit collateralized by mortgage servicing rights, and custodial deposits with some of the largest non-depository financial institutions and mortgage bankers in the industry.
Merchants Bank currently has warehouse repurchase agreements, loan participations, operating lines of credit collateralized by mortgage 4 Table of Contents servicing rights, and custodial deposits with some of the largest non-depository financial institutions and mortgage bankers in the industry.
Competition We compete in a number of areas, including commercial and retail banking, residential mortgages, and multi-family FHA, Fannie Mae, and Freddie Mac affordable loan originations in the multi-family and healthcare sectors. These industries are highly competitive, and the Company faces strong direct competition for deposits, loans, and loan originations and other financial-related services.
Competition We compete in several areas, including commercial and retail banking, SBA, residential mortgages, warehouse lending, and multi-family FHA, Fannie Mae, and Freddie Mac affordable loan originations in the multi-family and healthcare sectors. These industries are highly competitive, and the Company faces strong direct competition for deposits, loans, and loan originations and other financial-related services.
MCC is also a fully integrated tax credit equity syndicator. Our syndication platform, paired with our comprehensive suite of debt offerings, allows us to deliver financing on all aspects of affordable housing transactions. The tax credit equity team specializes in tax-advantaged affordable housing projects with Section 42 Low-Income Housing Tax Credits (“LIHTC”), Historic Rehabilitation Tax Credits, and State tax credits.
Our syndication platform, paired with our comprehensive suite of debt offerings, allows us to deliver financing on all aspects of affordable housing transactions. The tax credit equity team specializes in tax-advantaged affordable housing projects with Section 42 Low-Income Housing Tax Credits (“LIHTC”), Historic Rehabilitation Tax Credits, and State tax credits.
Our mortgage servicing portfolio consists primarily of Merchants Bank of Indiana balance sheet loans, Federal Housing Authority (“FHA”) loans, and service Federal National 3 Table of Contents Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) loans. Our origination platform and servicing portfolio are significant sources of our noninterest income and deposits.
Our mortgage servicing portfolio consists primarily of Merchants Bank balance sheet loans, Federal Housing Authority (“FHA”) loans, and affordable Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) loans. Our origination platform and servicing portfolio are significant sources of our noninterest income and deposits.
The warehouse financing facilities are secured by residential and multi-family mortgage loans underwritten to 4 Table of Contents standards approved by Merchants Bank that are generally comparable to those established by Fannie Mae, Freddie Mac, FHA and Veterans Affairs (“VA”). Mortgage Warehousing funded $111 billion of loan principal in 2020, $78 billion in 2021 and $33.2 billion in 2022.
The warehouse financing facilities are secured by residential and multi-family mortgage loans underwritten to standards approved by Merchants Bank that are generally comparable to those established by Fannie Mae, Freddie Mac, FHA and Veterans Affairs (“VA”). Mortgage Warehousing funded $78.3 billion of loan principal in 2021, $33.2 billion in 2022 and $33.0 billion in 2023.
The FDIC maintains the DIF by assessing depository institutions an insurance premium. The FDIC’s risk-based assessment system requires insured institutions to pay deposit insurance premiums based on the risk that each institution poses to the DIF. The rate is applied to the institution’s total average consolidated assets during the assessment period less average tangible equity (i.e., Tier 1 capital).
The FDIC’s risk-based assessment system requires insured institutions to pay deposit insurance premiums based on the risk that each institution poses to the DIF. The rate is applied to the institution’s total average consolidated assets during the assessment period less average tangible equity (i.e., Tier 1 capital).
In 2022, we also began making a discretionary contribution equal to 3% of an employee’s eligible compensation under our 401(k) plan each pay period regardless of whether such employee also contributed.
We make a discretionary contribution equal to 3% of an employee’s eligible compensation under our 401(k) plan each pay period regardless of whether such employee also contributed.
(The CFPB has similar authority over certain nonbanking organizations.) Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination, servicing and sales.
Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination, servicing and sales.
Merchants Bank receives deposits from customers located primarily in Hamilton, Marion, Randolph and surrounding counties in Indiana and from the escrows generated by the servicing activities of MCC and MCS. FMBI receives deposits from and makes loans to customers located through multiple branches in Illinois.
Merchants Bank receives deposits from customers located primarily in Hamilton, Marion, Randolph and surrounding counties in Indiana and from the escrows generated by the servicing activities of MCC and MCS. Until its branches were sold in January 2024, FMBI received deposits from and made loans to customers located through multiple branches in Illinois.
The Federal Reserve has adopted an exception to this approval requirement for well-capitalized BHCs that meet certain conditions.
The Federal Reserve has adopted an exception to this approval requirement for repurchase or redemptions of common stock for well-capitalized BHCs that meet certain conditions.
As of December 31, 2022, we had $12.6 billion in assets, $10.1 billion of deposits and $1.5 billion of shareholders’ equity. We were founded in 1990 as a mortgage banking company, providing financing for multi-family housing and senior living properties.
As of December 31, 2023, we had $17.0 billion in assets, $14.1 billion of deposits and $1.7 billion of shareholders’ equity. We were founded in 1990 as a mortgage banking company, providing financing for multi-family housing and senior living properties.
Merchants Bank of Indiana (“Merchants Bank”), one of our wholly owned banking subsidiaries, operates under an Indiana charter and provides traditional community banking services, as well as portfolio lending for multi-family and healthcare facility loans, retail and correspondent residential mortgage banking and agricultural lending. Merchants Bank has six depository branches located in Carmel, Indianapolis, Lynn, Spartanburg, and Richmond, Indiana.
Merchants Bank of Indiana (“Merchants Bank”), one of our wholly owned banking subsidiaries, operates under an Indiana charter and provides traditional community banking services, as well as portfolio lending for multi-family and healthcare facility loans, retail and correspondent residential mortgage banking, SBA lending, and agricultural lending.
Our commitment to DEI has also led to the creation of an employee level committee focused on DEI and our hiring of an individual during 2022 who will lead our DEI efforts, including to lead such committee. Some activities launched in 2022 included regular educational events for all employees and an open forum for DEI topics of discussion.
Our commitment to DEI also led to the creation of an employee level committee focused on DEI and our hiring of an individual who leads our DEI efforts, including such committee. Some activities that have been launched include regular educational events for all employees and an open forum for DEI topics of discussion.
We believe that the range and quality of products that we offer, the knowledge of our personnel and our emphasis on building long-lasting relationships, along with our diversified business model, sets us apart from our competitors. Human Capital As of December 31, 2022, we had approximately 556 full-time employees.
We believe that the range and quality of products that we offer, the knowledge of our personnel and our emphasis on building long-lasting relationships, along with our diversified business model, sets us apart from our competitors. Human Capital As of December 31, 2023, we had approximately 618 employees located in multiple states, including 364 employees in Central Indiana.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can impact the conduct and growth of their businesses.
The Company has been subject to continuous monitoring since it exceeded $10 billion in total assets. This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can impact the conduct and growth of their businesses.
There are multiple investor outlets, including direct sale capability to Fannie Mae, Freddie Mac, Federal Home Loan Bank (“FHLB”) of Indianapolis and Chicago, and other third-party investors to allow Merchants Mortgage a best execution at sale. Merchants Mortgage also originates loans held for investment and earns interest income over the life of the loan.
There are multiple investor outlets, including direct sale capability to Fannie Mae, Freddie Mac, Federal Home Loan Bank (“FHLB”) of Indianapolis, and other third-party investors to allow Merchants Mortgage a best execution at sale.
Merchants Bank is approved to sell agricultural loans in the secondary market through the Federal Agricultural Mortgage Corporation (“Farmer Mac”) and uses this relationship to manage interest rate risk within the agricultural loan portfolio.
Merchants Bank is approved to sell agricultural loans in the secondary market through the Federal Agricultural Mortgage Corporation (“Farmer Mac”) and uses this relationship to manage interest rate risk within the agricultural loan portfolio. Merchants Bank is also a Certified Lender with the Farm Service Agency to offset credit risk inherent in the Agriculture loan portfolio.
Our contribution is in the form of cash and is invested according to the employee’s current investment allocation. 6 Table of Contents ​ Additionally, while the health and safety of our employees is always the highest priority, the COVID-19 pandemic required us to reevaluate our efforts and we made numerous changes and accommodations to help ensure employees remain healthy, safe, and productive.
Our contribution is in the form of cash and is invested according to the employee’s current investment allocation. ​ Additionally, while the health and safety of our employees is always the highest priority, we continuously evaluate our efforts and we make changes or accommodations to help ensure employees remain healthy, safe, and productive.
See “ Operating Segment Analysis for the Years Ended December 31, 2022 and 2021” in Item 7 “ Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 26, “Segment Information,” in the notes to our Consolidated Financial Statements for further information about our segments.
See Item 7: “ Management’s Discussion and Analysis of Financial Condition and Results of Operations - Operating Segment Analysis for the Years Ended December 31, 2023 and 2022” and Note 26: Segment Information for further information about our segments.
Capital Requirements and Basel III Apart from the capital levels for insured depository institutions that were established by FDICIA for the prompt corrective action regime discussed above, the federal regulators have issued rules that impose minimum capital requirements on both insured depository institutions and their holding companies (with the exception of BHCs with less than $1 billion in pro forma consolidated assets and that meet other prerequisites).
Capital Requirements and Basel III Apart from the capital levels for insured depository institutions that were established by FDICIA for the prompt corrective action regime discussed above, the federal regulators have issued rules that impose minimum capital requirements on both insured depository institutions and their holding companies.
The gain on sale of loans and servicing fees generated primarily from the multi-family rental real estate loans servicing portfolio contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, and brokered deposits.
The gain on sale of loans and servicing fees generated from the multi-family rental real estate, residential, and SBA loans, as well as fees and fair market value adjustments to servicing related assets, contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, and brokered deposits, as well as short-term borrowings.
The BHC Act also prohibits, with certain exceptions, a BHC from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any “nonbanking” company unless the Federal Reserve finds the nonbanking activities be “so closely related to banking . . . as to be a proper incident thereto” or another exception applies.
The Federal Reserve evaluates acquisition applications based on, among other things, competitive factors, supervisory factors, adequacy of financial and managerial resources, and banking and community needs considerations. 8 Table of Contents The BHC Act also prohibits, with certain exceptions, a BHC from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any “nonbanking” company unless the Federal Reserve finds the nonbanking activities be “so closely related to banking . . . as to be a proper incident thereto” or another exception applies.
For example, we have been named to the list of “Best Places to Work in Indiana” by the Indiana Chamber of Commerce every year since 2016 and in 2022 our turnover rate was only 11%.
For example, we were named to the list of “Best Places to Work in Indiana” by the Indiana Chamber of Commerce every year from 2016 to 2022 and were named as a “Top Workplace” by The Indianapolis Star in 2023 and in 2023 our turnover rate was only 10%.
The specific limits depend on a number of factors, including the bank’s type of charter, recent earnings, recent dividends, level of capital and regulatory status. The regulators are authorized, and under certain circumstances are required, to prohibit the payment of dividends or other distributions if the regulators determine that making such payments would be an unsafe or unsound practice.
The regulators are authorized, and under certain circumstances are required, to prohibit the payment of dividends or other distributions if the regulators determine that making such payments would be an unsafe or unsound practice.
The primary source of liquidity is provided by custodial and corporate deposits of its customers. Banking The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Banking operates primarily in the Indianapolis metropolitan and Randolph County, Indiana markets, as well as Ford County in Central Illinois.
The primary source of liquidity is provided by custodial and corporate deposits of its customers. Banking The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Retail banking operates primarily in central Indiana and Richmond. Our correspondent mortgage banking business, like Multi-family Mortgage Banking and Mortgage Warehousing, is a national business.
The extension of the capital rules with respect to servicing rights was the only portion of the Transitions Rule that was material to the Company.
The extension of the capital rules with respect to servicing rights was the only portion of the Transitions Rule that was material to the Company. On July 9, 2019, the federal regulators finalized and adopted the final Simplification Rule.
Furthermore, under certain circumstances, a BHC may not be able to purchase its own shares where the gross consideration will equal 10% or more of the Company’s net worth, without obtaining approval of the Federal Reserve. 8 Table of Contents The Federal Reserve Act subjects banks and their affiliates to certain requirements and restrictions when dealing with each other (affiliate transactions include transactions between a bank and its BHC).
Furthermore, under certain circumstances, a BHC may not be able to purchase its own shares where the gross consideration will equal 10% or more of the Company’s net worth, without obtaining approval of the Federal Reserve.
We also offer customized loan products for need-based skilled nursing facilities, as well as independent living, assisted living, and memory care. A variety of loan products are available to accommodate acquisition, rehabilitation, and refinancing of healthcare properties throughout the country. These loans are underwritten with the intent to convert to permanent loans within three years.
A variety of loan products are available to accommodate acquisition, rehabilitation, and refinancing of healthcare properties throughout the country. These loans are underwritten with the intent to convert FHA permanent loans within three years.
Low-income tax credit syndication and debt fund offerings complement the lending activities of new and existing multi-family mortgage customers. The securities available for sale funded by MCC custodial deposits are pledged to 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.
The securities available for sale and held to maturity funded by MCC custodial deposits or purchases of securitized loans originated by MCC are pledged to 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.
We believe that MCC is one of the largest government agency servicers in the country based on aggregate loan principal balance. Our capital markets team also has expertise in facilitating larger scale securitization initiatives, both privately and with government agencies, to successfully manage our capital efficiency, maximize liquidity, and minimize credit risk on our balance sheet.
Our capital markets team also has expertise in facilitating larger scale securitization initiatives, both privately and with government agencies, to successfully manage our capital efficiency, maximize liquidity, and minimize credit risk on our balance sheet. One of the segment’s primary sources of funding is the national secondary mortgage market of federally chartered agencies and the federal government.
The rule has not had a significant impact on our mortgage production operations since most of the loans Merchants Bank currently originates would constitute “qualified mortgages” under the rule, including under the revised definition that became effective on June 30, 2021. 14 Table of Contents Mortgage Servicing Additionally, the CFPB has issued a series of final rules as part of an ongoing effort to address mortgage servicing reforms and create uniform standards for the mortgage servicing industry.
The rule has not had a significant impact on our mortgage production operations since most of the loans Merchants Bank currently originates would constitute “qualified mortgages” under the rule, including under the revised definition that became effective on June 30, 2021.
The Company, Merchants Bank, and FMBI elected to begin using CBLR in the first quarter of 2020 and utilized this measure of reporting through June 30, 2022. At September 30, 2022 the Company’s total assets exceeded $10 billion, off-balance sheets exposures exceeded 25% of total assets, and the allowable grace periods under the CBLR rules expired.
Eligibility criteria to utilize CBLR included having total assets less than $10 billion and off-balance sheet exposures that were less than 25% of total assets, among others. The Company, Merchants Bank, and FMBI elected to begin using CBLR in the first quarter of 2020 and utilized this measure of reporting through June 30, 2022.
Our correspondent mortgage banking business, 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 SBA lending is currently a regional business with offices in four states. The Banking segment has a well-diversified customer and borrower base and has experienced significant growth over the past three years.
Single-Family Mortgage Lending, Correspondent Lending and Servicing Merchants Mortgage is the branded division of Merchants Bank that is a full service single-family mortgage origination and servicing platform. Merchants Mortgage is both a retail and correspondent mortgage lender. Merchants Mortgage offers agency eligible, jumbo fixed and hybrid adjustable-rate mortgages for purchase or refinancing of single-family residences.
Single-Family Mortgage Lending, Correspondent Lending and Servicing Merchants Mortgage is the branded division of Merchants Bank that is a single-family mortgage origination and servicing platform. Merchants Mortgage is both a retail and correspondent mortgage lender.
This cost-effective, reliable funding source is a powerful tool in expanding the availability of affordable housing in rural markets that often have the greatest need. In addition to the loans originated directly through our Multi-Family Mortgage Banking segment, we also fund loans brought to us by non-affiliated entities and service or sub-service loans for a fee.
In addition to the loans originated directly through our Multi-Family Mortgage Banking segment, we also fund loans brought to us by non-affiliated entities and service or sub-service loans for a fee. MCC is also a fully integrated tax credit equity syndicator.
Farmers-Merchants Bank of Illinois (“FMBI”), our other wholly owned banking subsidiary, operates under an Illinois charter and provides traditional community banking services and agricultural lending. FMBI has four depository branches located in Joy, Paxton, Melvin, and Piper City, Illinois. Our business consists primarily of funding low risk loans meeting underwriting standards of government programs, under an originate to sell model.
FMBI had four depository branches located in Joy, Paxton, Melvin, and Piper City, Illinois. Our business consists primarily of funding fixed rate, low risk loans meeting underwriting standards of government programs, under an originate to sell model, while retaining adjustable rate loans as held for investment to reduce interest rate risk.
One of the segment’s primary sources of funding is the national secondary mortgage market of federally chartered agencies and the federal government. Another primary source of funding is our Banking segment. Investors in the secondary market are primarily large financial institutions, brokerage companies, insurance companies and real estate investment trusts.
Another primary source of funding is our Banking segment. Investors in the secondary market are primarily large financial institutions, brokerage companies, insurance companies and real estate investment trusts. These programs facilitate secondary market activities in order to provide funding for the multi-family mortgage market. Mortgage Warehousing We started the warehouse lending business in 2009 because of dislocation in the market.
This designation provides us delegated loan approval, closing and servicing authority that enables loan decisions to be made more rapidly.
In January 2018, Merchants Bank was awarded Preferred Lender Program status, the SBA’s highest level of approval that a lender can hold. This designation provides us delegated loan approval, closing and servicing authority that enables loan decisions to be made more rapidly.
At December 31, 2022, Merchants Bank and FMBI were well capitalized, as defined by applicable regulations.
At December 31, 2023, Merchants Bank was well capitalized, and also well capitalized with the Basel III capital conservation buffer, as defined by applicable regulations.
There are no conditions or events since that notification that management believes have changed the Company’s, Merchants Bank’s, or FMBI’s category. Deposit Insurance Fund and Financing Corporation Assessments The Deposit Insurance Fund (“DIF”) of the FDIC insures the deposits of Merchants Bank and FMBI up to $250,000 per depositor, qualifying joint accounts, and certain other accounts.
Deposit Insurance Fund and Financing Corporation Assessments The Deposit Insurance Fund (“DIF”) of the FDIC insures the deposits of Merchants Bank up to $250,000 per depositor, qualifying joint accounts, and certain other accounts. The FDIC maintains the DIF by assessing depository institutions an insurance premium.
These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across all businesses and geographic locations.
Standards over information security are Board-approved and various types of control testing is conducted throughout the year, by internal and external parties. Recommendations are implemented and reported to various committees. These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across all businesses and geographic locations.
There are various legal limitations on the extent to which Merchants Bank or FMBI can supply funds to us. Our principal source of funds consists of dividends from Merchants Bank. State and federal law restrict the amount of dividends that banks may pay to its shareholders or BHC.
Our principal source of funds consists of dividends from Merchants Bank. State and federal law restrict the amount of dividends that banks may pay to its shareholders or BHC. The specific limits depend on a number of factors, including the bank’s type of charter, recent earnings, recent dividends, level of capital and liquidity, and regulatory status.
These debt investment vehicles ultimately support the mission of MCC by creating additional lending capacity and competitive loan terms for clients. Through the Multi-Family Mortgage Banking segment, many of our originated loans are sold to government agencies as mortgage-backed securities within approximately 30 days. As these loans are sold, servicing rights are traditionally retained.
Through the Multi-Family Mortgage Banking segment, many of our fixed rate originated loans are sold to government agencies as mortgage-backed securities within approximately 30 days. As these loans are sold, servicing rights are traditionally retained. We believe that MCC is one of the largest government agency servicers in the country based on aggregate loan principal balance.
Under the Simplification Rule, on January 1, 2020, this threshold was raised to 25% of common equity, which we expect to benefit the Company because it will reduce the deductions to capital that have traditionally been required. However, the non-deducted portion of servicing rights must be risk weighted at 250%.
Under the Simplification Rule, on January 1, 2020, this threshold was raised to 25% of common equity. However, the non-deducted portion of servicing rights must be risk weighted at 250%. On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for credit losses, which would cause our net income, return on equity and capital to decrease. 19 Table of Contents ​ We may be adversely impacted by the transition from LIBOR as a reference rate. ​ In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”).
Biggest changeIf the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for credit losses, which would cause our net income, return on equity and capital to decrease.
Our future acquisition activities could be material to our business and involve a number of risks, including the following: ● intense competition from other banking organizations and other acquirers for potential merger candidates; ● market pricing for desirable acquisitions resulting in returns that are less attractive than we have traditionally sought to achieve; ● incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business; ● using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets; ● potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including consumer compliance issues; ● the time and expense required to integrate the operations and personnel of the combined businesses; ● experiencing higher operating expenses relative to operating income from the new operations; ● losing key employees and customers; ● reputational issues if the target’s management does not align with our culture and values; ● significant problems relating to the conversion of the financial and customer data of the target; ● integration of acquired customers into our financial and customer product systems; or ● regulatory timeframes for review of applications may limit the number and frequency of transactions we may be able to consummate.
Our future acquisition activities could be material to our business and involve a number of risks, including the following: ● intense competition from other banking organizations and other acquirers for potential merger candidates; ● market pricing for desirable acquisitions resulting in returns that are less attractive than we have traditionally sought to achieve; ● incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business; ● using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets; ● potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including consumer compliance issues; 25 Table of Contents ● the time and expense required to integrate the operations and personnel of the combined businesses; ● experiencing higher operating expenses relative to operating income from the new operations; ● losing key employees and customers; ● reputational issues if the target’s management does not align with our culture and values; ● significant problems relating to the conversion of the financial and customer data of the target; ● integration of acquired customers into our financial and customer product systems; or ● regulatory timeframes for review of applications may limit the number and frequency of transactions we may be able to consummate.
Legal, Regulatory, and Compliance Risks We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
Legal, Regulatory, and Compliance Risks We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, ability to grow, as well as our ability to maintain regulatory compliance, would be adversely affected.
In addition, we, on a consolidated basis, and Merchants Bank and FMBI, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations.
In addition, we, on a consolidated basis, and Merchants Bank on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations.
There has also been a rise in fintech companies that develop new technology to compete with traditional financial methods in the delivery of financial services. Ultimately, we may not be able to compete successfully against current and future competitors.
There has also been a rise in financial technology companies that develop new technology to compete with traditional financial methods in the delivery of financial services. Ultimately, we may not be able to compete successfully against current and future competitors.
Liquidity stress testing, interest rate sensitivity analysis, allowance for credit losses computations, mortgage servicing right valuations, and the identification of possible violations of anti-money laundering regulations are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance.
Liquidity stress testing, interest rate sensitivity analysis, allowance for credit losses computations, mortgage servicing rights valuations, and the identification of possible violations of anti-money laundering regulations are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance.
Specifically, we receive core systems processing, mortgage servicing, online wire processing, essential web hosting and other internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted.
Specifically, we receive core systems processing, mortgage servicing, online wire processing, mobile and online banking, essential web hosting and other internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted.
Thus, any borrowing that must be done by us to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition, and results of operations. Item 1B. Unresolved Staff Comments. None. Item 2. Properties.
Thus, any borrowing that must be done by us to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition, and results of operations. Item 1B. Unresolved Staff Comments. None.
Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require 28 Table of Contents more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs.
Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships.
We may be adversely affected by the soundness of other financial institutions. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships.
Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, increases in nonperforming assets and foreclosures, lower home sales and commercial activity, and fluctuations in the multi-family FHA financing sector.
Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, increases in nonperforming assets and 19 Table of Contents foreclosures, lower home sales and commercial activity, and fluctuations in the multi-family FHA financing sector.
The financial services industry could become even more 18 Table of Contents competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, some of our current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than we may be able to accommodate.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, some of our current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than we may be able to accommodate.
If we violate HUD lending requirements, our multi-family FHA origination business could be adversely affected. We originate, sell and service loans under HUD programs, and make certifications regarding compliance with applicable requirements and guidelines.
If we violate HUD requirements, our multi-family FHA origination and servicing business could be adversely affected. We originate, sell and service loans under HUD programs, and make certifications regarding compliance with applicable requirements and guidelines.
When interest rates rise, the rate of interest we pay on our liabilities, such as deposits, rises more quickly than the rate of interest that we receive on our interest-bearing assets, such as loans, which may cause our profits to decrease.
When interest rates rise, the rate of interest we pay on our liabilities, such as deposits, could rise more quickly than the rate of interest that we receive on our interest-bearing assets, such as loans, which may cause our profits to decrease.
While we have not recorded any impairment charges since we initially recorded the goodwill, there can be no assurance 21 Table of Contents that our future evaluations of our existing goodwill or goodwill we may acquire in the future will not result in findings of impairment and related write-downs, which could adversely affect our business, financial condition and results of operations.
While we have not recorded any impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of our existing goodwill or goodwill we may acquire in the future will not result in findings of impairment and related write-downs, which could adversely affect our business, financial condition and results of operations.
Additionally, 2022 had elevated levels of inflation and if these conditions persist, it could also cause increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness. All of these factors are generally detrimental to our business.
Additionally, 2022 and 2023 had elevated levels of inflation and interest rates; if these conditions persist, it could also cause increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness. All of these factors are generally detrimental to our business.
The CFPB may propose new rules on consumer financial products or services, which could have an adverse effect on our business, financial condition and results of operations if any such rules limit our ability to provide such financial products or services. The Company currently has an approved CRA strategic plan.
The CFPB may propose new rules on consumer financial products or services, which could have an 30 Table of Contents adverse effect on our business, financial condition and results of operations if any such rules limit our ability to provide such financial products or services. The Company currently has an approved CRA strategic plan.
Their use also affects interest rates charged on loans or paid on deposits. 29 Table of Contents The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.
Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.
Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2022, our goodwill totaled $15.8 million.
Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2023, our goodwill totaled $15.8 million.
Although management believes that the ACL-Loans is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for credit losses in the future to further supplement the ACL-Loans, either due to management’s decision to do so or because our banking regulators require us to do so.
Although management believes that the ACL-Loans is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for credit losses in the future to further 20 Table of Contents supplement the ACL-Loans, either due to management’s decision to do so or because our banking regulators require us to do so.
A downgrade of the credit rating of the U.S. government, or of its agencies, GSEs or related institutions or instrumentalities, may also adversely affect the market value of such instruments and, further, 22 Table of Contents exacerbate the other risks to which we are subject and any related adverse effects on our business, financial condition or results of operations.
A downgrade of the credit rating of the U.S. government, or of its agencies or related institutions or instrumentalities, may also adversely affect the market value of such instruments and, further, exacerbate the other risks to which we are subject and any related adverse effects on our business, financial condition or results of operations.
Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that 27 Table of Contents affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
In order to be a “well-capitalized” depository institution under Basel III, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more.
In order to be a “well-capitalized” depository institution under Basel III, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; 29 Table of Contents a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more.
Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers. 24 Table of Contents We are subject to certain operational risks, including customer or employee fraud and data processing system failures and errors.
Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers. We are subject to certain operational risks, including customer or employee fraud and data processing system failures and errors.
Our multi-family servicing rights assets typically have a ten year call protection, but as interest rates decrease, the potential for prepayment increases and the fair market value of our servicing rights assets may decrease. Our ability to mitigate this decrease in value is largely dependent on our ability to be the refinancer and retain servicing rights.
Our multi-family servicing rights assets typically have a ten year call protection, but as interest rates decrease, the potential for prepayment increases and the fair market value of our servicing rights assets may decrease. Our ability to mitigate this decrease in value is largely dependent on our ability to refinance the loan and retain servicing rights.
Changes in accounting standards could materially impact our financial statements. From time to time, FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards.
From time to time, FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards.
While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact our decision-making ability or, if we become subject to regulatory stress-testing in the future, adverse regulatory scrutiny.
While we believe these quantitative techniques and approaches improve our decision-making, they also 23 Table of Contents create the possibility that faulty data or flawed quantitative approaches could negatively impact our decision-making ability or, if we become subject to regulatory stress-testing in the future, adverse regulatory scrutiny.
The ACL-Loans represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant 20 Table of Contents information available to us.
The ACL-Loans represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us.
These entities account for a substantial portion of the secondary market in residential mortgage loans. Because the largest participants in the secondary market are Fannie Mae and Freddie Mac, GSEs whose activities are governed by federal law, any future changes in laws that significantly affect the activity of these GSEs could, in turn, adversely affect our operations.
These entities account for a substantial portion of the secondary market in residential mortgage loans. Because the largest participants in the secondary market are agencies whose activities are governed by federal law, any future changes in laws that significantly affect the activity of these agencies could, in turn, adversely affect our operations.
The unrealized losses resulting from holding these securities would be recognized in other comprehensive income (loss) and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced.
The unrealized losses resulting from holding securities available for sale would be recognized in other comprehensive income (loss) and reduce total shareholders’ equity. Unrealized losses do not negatively impact our 26 Table of Contents regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced.
Upon exceeding $10 billion in total assets for four consecutive quarters, our banks will be subject to direct examination by the CFPB and we cannot be certain how such direct examination will impact us. Additionally, institutions over $10 billion are also subject to limits on interchange fees paid by merchants when debit cards are used as payment.
However, in 2023, after exceeding $10 billion in total assets for four consecutive quarters, Merchants Bank became subject to direct examination of the CFPB. We cannot be certain how such direct examination will continue to impact us. Additionally, institutions over $10 billion are also subject to limits on interchange fees paid by merchants when debit cards are used as payment.
Our operations consist of offering banking and residential mortgage services, and we also offer multi-family agency financing to generate noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas.
The banking business is highly competitive, and we experience competition in our market from many other financial institutions. Our operations consist of offering banking and residential mortgage services, and we also offer multi-family agency financing to generate noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas.
If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
Secondarily, 23 Table of Contents because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making. System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making. System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities. The computer systems and network infrastructure we use could be vulnerable to hardware and cybersecurity issues.
Our regulators may also consider our preparation for compliance with their standards when examining our operations generally or considering any request for regulatory approval we may make. ​ Currently, our banks are subject to regulations adopted by the CFPB, but the FDIC is primarily responsible for examining their compliance with consumer protection laws and those CFPB regulations.
Our regulators may also consider our compliance with their standards when examining our operations generally or considering any request for regulatory approval we may make. ​ Previously, while Merchants Bank was subject to regulations adopted by the CFPB, the FDIC was primarily responsible for examining Merchants Bank’s compliance with consumer protection laws and the CFPB’s regulations.
Any significant impairment of our eligibility with any of the GSEs could materially and adversely affect our operations. Further, the criteria for loans to be accepted under such programs may be changed from time to time by the sponsoring entity, which could result in a lower volume of corresponding loan originations.
Further, the criteria for loans to be accepted under such programs may be changed from time to time by the sponsoring entity, which could result in a lower volume of corresponding loan originations.
Changes in interest rates and pricing decisions by our loan competitors may adversely affect demand for our mortgage loan products, the revenue realized on the sale or portfolio of loans, revenues received from servicing such loans and the valuation of our servicing rights.
Changes in interest rates and pricing decisions by our loan competitors may adversely affect demand for our mortgage loan products, the revenue realized on the sale or portfolio of loans, revenues received from servicing such loans and the valuation of our servicing rights. 17 Table of Contents Our mortgage banking profitability could significantly decline if we are not able to originate and resell a high volume of mortgage loans.
The profitability of participating in specific programs may vary depending on a number of factors, including our administrative costs of originating and purchasing qualifying loans and our costs of meeting such criteria. 17 Table of Contents The ability for us and our warehouse financing customers to originate and sell residential mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by GSEs and other institutional and non-institutional investors.
The ability for us and our warehouse financing customers to originate and sell residential mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by agencies and other institutional and non-institutional investors.
Compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, new proposals for legislation may be introduced in the U.S.
Certain elements of the Dodd-Frank Act are required for institutions with more than $10 billion in assets, such as Merchants Bank. Compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects. 30 Table of Contents The Federal Reserve may require us to commit capital resources to support Merchants Bank or FMBI.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects. The Federal Reserve may require us to commit capital resources to support Merchants Bank.
Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy, which, in turn, could have an adverse effect on our business, financial condition and results of operations. ​ 25 Table of Contents Market, Interest Rate, and Liquidity Risks Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy, which, in turn, could have an adverse effect on our business, financial condition and results of operations.
Operational Risks Our risk management framework may not be effective in mitigating risks and/or losses to us. Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment.
The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located.
As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located.
If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace them, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps 24 Table of Contents materially.
In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.
A significant portion of our loan portfolio is comprised of loans with real estate as a primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio.
Negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses. A significant portion of our loan portfolio is comprised of loans with real estate as a primary or secondary component of collateral.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected. 28 Table of Contents Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. A source of our funds consists of our customer deposits, including escrow deposits held in connection with our multi-family mortgage servicing business.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity.
Under these agreements, we may be required to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss.
Under these agreements, we may be required to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected.
In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations.
In addition, the bodies that interpret the accounting standards (such as banking regulators or 21 Table of Contents outside auditors) may change their interpretations or positions on how these standards should be applied.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations. We depend to a significant extent on a number of relationships with third-party service providers.
Many risks can arise from all types of AI, such as lack of accountability and explainability, reliance on large volumes of data, potential bias, privacy concerns, third-party risk, cybersecurity risks, and consumer protection concerns. ​ Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations. ​ We depend to a significant extent on a number of relationships with third-party service providers.
Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied.
In addition, new proposals for legislation may be introduced in the U.S. Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices.
Accordingly, we cannot provide assurances that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
Accordingly, we cannot provide assurances that we will be able to raise additional capital if needed or on terms acceptable to us.
If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations. In addition, our ability to sell mortgage loans readily is dependent upon our ability to remain eligible for the programs offered by GSEs and other institutional and non-institutional investors.
If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations.
A significant portion of our total deposits are concentrated in large mortgage non-depository financial institutions. These concentration levels expose us to the risk that one of these depositors will experience financial difficulties, withdraw its deposits, or otherwise lose the ability to generate custodial funds due to business or regulatory realities.
These concentration levels expose us to the risk that one of these depositors will experience financial difficulties, withdraw its deposits after providing Merchants Bank with any contractually required prior notice (typically 180 days), or otherwise lose the ability to generate custodial funds due to business or regulatory realities.
We are subject to heightened regulatory requirements because we exceed $10 billion in assets . ​ At December 31, 2022 we had total assets of $12.6 billion. We expect to continue to exceed $10 billion in total assets in the future.
We are subject to heightened regulatory requirements because we exceed $10 billion in assets . ​ At December 31, 2023 we had total assets of $17.0 billion. We expect to continue to exceed $10 billion in total assets in the future. Upon crossing that threshold, we became subject to increased regulatory scrutiny and expectations imposed by the Dodd-Frank Act.
Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities.
Market, Interest Rate, and Liquidity Risks Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities.
If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios. The slope of the yield curve affects our net interest income and we could experience net interest margin compression if our interest earning assets reprice downward while our interest-bearing liability rates fail to decline in tandem.
The slope of the yield curve affects our net interest income and we could experience net interest margin compression if our interest earning assets reprice downward while our interest-bearing liability rates fail to decline in tandem. This would have a material adverse effect on our net interest income and our results of operations.
Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and cloud vendors could prove inadequate.
However, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminal intent on committing cyber-crime. Increasing sophistication of criminal organizations and advanced persistent threats make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and cloud vendors could prove inadequate.
We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations.
Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations.
In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.
In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it. 18 Table of Contents We face strong competition from financial services companies and other companies that offer banking, mortgage, leasing, and providers of multi-family agency financing and servicing, which could harm our business.
We regularly add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing. However, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminal intent on committing cyber-crime.
We regularly add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing.
If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage.
If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.
The computer systems and network infrastructure we use could be vulnerable to hardware and cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure, or a similar catastrophic event.
Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure, or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors.
Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. Institutions that satisfy CBLR are not subject to these capital ratio requirements to be “well capitalized” or required to maintain the capital conservation buffer.
Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital.
Upon crossing that threshold, we are subject to increased regulatory scrutiny and expectations imposed by the Dodd-Frank Act, and will no longer be excepted from the “Volcker Rule”. Compliance with the standards imposed by our regulators because of such scrutiny and expectations could increase our operational costs.
Compliance with the standards imposed by our regulators because of such scrutiny and expectations could increase our operational costs.
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.
Even if we are able to replace them, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations. ​ We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology.
Moreover, when interest rates increase further, there can be no assurance that our mortgage production will continue at current levels.
Mortgage production, especially refinancing activity, declines in rising interest rate environments. Interest rates had been historically low in recent years, but the market has seen interest rate increases throughout 2023. Moreover, if interest rates increase further, there can be no assurance that our mortgage production will continue at current levels.
Removed
Our mortgage banking profitability could significantly decline if we are not able to originate and resell a high volume of mortgage loans. Mortgage production, especially refinancing activity, declines in rising interest rate environments. Interest rates have been historically low over the last few years, but the market is anticipating interest rate increases in the future.
Added
In addition, our ability to sell mortgage loans readily is dependent upon our ability to remain eligible for the programs offered by government agencies (“agency”), such as Fannie Mae, Freddie Mac, and Ginnie Mae, and other institutional and non-institutional investors. Any significant impairment of our eligibility with any of the agencies could materially and adversely affect our operations.
Removed
We face strong competition from financial services companies and other companies that offer banking, mortgage, leasing, and providers of multi-family agency financing and servicing, which could harm our business. The banking business is highly competitive, and we experience competition in our market from many other financial institutions.
Added
The profitability of participating in specific programs may vary depending on a number of factors, including our administrative costs of originating and purchasing qualifying loans and our costs of meeting such criteria.
Removed
On November 30, 2020, LIBOR’s administrator, the ICE Benchmark Administration (“IBA”) announced that it would consult on its intention to continue to publish most LIBOR term rates (excluding the one week and two month USD LIBOR settings) through June 30, 2023.
Added
On January 26, 2024, the Company sold its Farmers-Merchants Bank of Illinois branches to Bank of Pontiac and CBI Bank &Trust and merged its banking charter into Merchants Bank. The transaction included the extinguishment of $7.8 million in goodwill. Changes in accounting standards could materially impact our financial statements.
Removed
These announcements indicate that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR.
Added
These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations.
Removed
Additionally, in 2020 Fannie Mae and Freddie Mac ceased accepting accept single family or multi-family adjustable rate mortgages (“ARMs”) indexed to LIBOR and currently will only accept ARMs indexed to the Federal Reserve’s Secured Overnight Financing Rate (“SOFR”).
Added
Downgrades to the credit rating of the Company or its subsidiaries by one or more of the credit rating agencies could have a material adverse effect on the cost of or our ability to raise additional capital for future growth.
Removed
Also, on November 30, 2020, the federal banking regulators issued guidance on the transition from LIBOR that, among other things, encouraged banks to stop using LIBOR in new financial contracts as soon as practicable but at least by December 31, 2021.
Added
Downgrades of the Company’s credit rating, and its perceived creditworthiness, could affect our ability to borrow funds and/or access capital markets on favorable terms. Such downgrades could adversely affect the future borrowings or capital raised, including substantially raising the costs and could cause creditors and business counterparties to raise collateral requirements.

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Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. ​ Mine Safety Disclosures ​ 31 ​ ​ ​ PART II ​ ​ ​ ​ ​ ​ Item 5. ​ Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ​ 31 ​ ​ ​ Item 6. ​ Selected Financial Data ​ 34 ​ ​ ​ Item 7. ​ Management’s Discussion and Analysis of Financial Condition and Results of Operations ​ 36 ​ ​ ​ Item 7A. ​ Quantitative and Qualitative Disclosures About Market Risk ​ 60 ​ ​ ​ Item 8. ​ Financial Statements and Supplementary Data ​ 63 ​ ​ ​
Biggest changeItem 4. ​ Mine Safety Disclosures ​ 33 ​ ​ ​ PART II ​ ​ ​ ​ ​ ​ Item 5. ​ Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ​ 33 ​ ​ ​ Item 6. ​ Selected Financial Data ​ 35 ​ ​ ​ Item 7. ​ Management’s Discussion and Analysis of Financial Condition and Results of Operations ​ 37 ​ ​ ​ Item 7A. ​ Quantitative and Qualitative Disclosures About Market Risk ​ 64 ​ ​ ​ Item 8. ​ Financial Statements and Supplementary Data ​ 67 ​ ​ ​

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAny future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, payment of dividends on our preferred stock, contractual restrictions and any other factors that our board of directors may deem relevant. 31 Table of Contents Dividend Restrictions Under the terms of each class of our preferred stock, we are not permitted to declare or pay any dividends on our common stock unless the dividends have been declared and paid on the shares of all our classes of preferred stock for the period since the last payment of dividends.
Biggest changeDividend Restrictions Under the terms of each class of our preferred stock, we are not permitted to declare or pay any dividends on our common stock unless the dividends have been declared and paid on the shares of all our classes of preferred stock for the period since the last payment of dividends.
There is no assurance that our common stock performance will continue in the future with the same or similar results as shown in the graph. 32 Table of Contents Securities Authorized for Issuance Under Equity Compensation Plans See Item 12 of this report for disclosure regarding securities authorized for issuance and equity compensation plans required by Item 201(d) of Regulation S-K.
There is no assurance that our common stock performance will continue in the future with the same or similar results as shown in the graph. Securities Authorized for Issuance Under Equity Compensation Plans See Item 12 of this report for disclosure regarding securities authorized for issuance and equity compensation plans required by Item 201(d) of Regulation S-K.
The graph assumes an investment of $100.00 in our common stock and each index on December 31, 2017 and reinvestment of all quarterly dividends. Measurement points are December 31, 2017 and the last trading day of each subsequent quarter through December 31, 2022.
The graph assumes an investment of $100.00 in our common stock and each index on December 31, 2018 and reinvestment of all quarterly dividends. Measurement points are December 31, 2018 and the last trading day of each subsequent quarter through December 31, 2023.
See Part I, Item 1 - “Supervision and Regulation—Merchants Bank and FMBI—Dividends.” Stock Performance Graph The following graph compares the cumulative total shareholder return on our common stock from December 31, 2017 through December 31, 2022. The graph compares our common stock with the Nasdaq Composite Index and the Nasdaq Bank Index.
See Part I, Item 1 - “Supervision and Regulation—Merchants Bank – Dividends.” ​ ​ ​ ​ 33 Table of Contents Stock Performance Graph The following graph compares the cumulative total shareholder return on our common stock from December 31, 2018 through December 31, 2023. The graph compares our common stock with the Nasdaq Composite Index and the Nasdaq Bank Index.
On March 8, 2023, the closing price of our common stock was $29.27. As of March 8, 2023, there were 43,233,618 shares of our common stock outstanding and 38 shareholders of record. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions.
On March 1, 2024, the closing price of our common stock was $42.57. As of March 1, 2024, there were 43,331,304 shares of our common stock outstanding and 32 shareholders of record. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions.
Removed
Unregistered Sales and Repurchases of Equity Securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Period ​ (a) Total number of shares (or units) purchased ​ ​ (b) Average price paid per share (or unit) ​ (c) Total number of shares (or units) purchased as part of publicly announced plans or programs ​ ​ (d) Maximum number (or approximate dollar value) of shares (or units) that may yet to be purchased under the plans or programs (1) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ October 1 - October 31, 2022 ​ — ​ $ — ​ — ​ $ 71,064,667 November 1 - November 30, 2022 ​ — ​ $ — ​ — ​ ​ 71,064,667 December 1 - December 31, 2022 ​ — ​ $ — ​ — ​ ​ 71,064,667 Total ​ — ​ $ — ​ — ​ $ 71,064,667 ​ (1) On November 17, 2021, the Company announced an increase in authorization for its stock repurchase program, up to $75,000,000 of common stock, expiring December 31, 2023.
Added
Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, payment of dividends on our preferred stock, contractual restrictions and any other factors that our board of directors may deem relevant.
Removed
On April 29, 2022, the Company entered into a Rule 10b5-1 plan (the “10b5-1 Plan”) with a broker for the repurchase of shares of its common stock commencing on May 3, 2022. The details of this repurchase plan were provided in the Form 8-K filed by the Company on May 24, 2022. ​ 33 Table of Contents
Added
Unregistered Sales and Repurchases of Equity Securities None. ​ ​ 34 Table of Contents

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeSelected Financial Data. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At or for the Year Ended December 31, (Dollars in thousands, except per share data) 2022 2021 2020 2019 2018 Balance Sheet Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Assets ​ $ 12,615,227 ​ $ 11,278,638 ​ $ 9,645,375 ​ $ 6,371,928 ​ $ 3,884,163 ​ Loans held for investment ​ 7,470,872 ​ 5,782,663 ​ 5,535,426 ​ 3,028,310 ​ 2,058,127 ​ Allowance for credit losses (1) ​ (44,014) ​ (31,344) ​ (27,500) ​ (15,842) ​ (12,704) ​ Loans held for sale ​ 2,910,576 ​ 3,303,199 ​ 3,070,154 ​ 2,093,789 ​ 832,455 ​ Deposits ​ 10,071,345 ​ 8,982,613 ​ 7,408,066 ​ 5,478,075 ​ 3,231,086 ​ Total liabilities ​ 11,155,488 ​ 10,123,229 ​ 8,834,754 ​ 5,718,200 ​ 3,462,926 ​ Total shareholders' equity ​ 1,459,739 ​ 1,155,409 ​ 810,621 ​ 653,728 ​ 421,237 ​ Tangible common shareholders' equity (non-GAAP) ​ 943,100 ​ 775,708 ​ 579,847 ​ 421,438 ​ 358,637 ​ Income Statement Data: ​ ​ ​ ​ ​ ​ Interest Income ​ $ 480,833 ​ $ 311,886 ​ $ 282,790 ​ $ 211,995 ​ $ 140,563 ​ Interest Expense ​ 162,282 ​ 33,892 ​ 58,644 ​ 89,697 ​ 50,592 ​ Net interest income ​ 318,551 ​ 277,994 ​ 224,146 ​ 122,298 ​ 89,971 ​ Provision for credit losses ​ 17,295 ​ 5,012 ​ 11,838 ​ 3,940 ​ 4,629 ​ Noninterest income ​ 125,936 ​ 157,333 ​ 127,473 ​ 47,089 ​ 49,585 ​ Noninterest expense ​ 136,050 ​ 125,385 ​ 96,424 ​ 63,313 ​ 50,900 ​ Income before taxes ​ 291,142 ​ 304,930 ​ 243,357 ​ 102,134 ​ 84,027 ​ Provision for income taxes ​ 71,421 ​ 77,826 ​ 62,824 ​ 24,805 ​ 21,153 ​ Net income ​ 219,721 ​ 227,104 ​ 180,533 ​ 77,329 ​ 62,874 ​ Preferred stock dividends ​ 25,983 ​ 20,873 ​ 14,473 ​ 9,216 ​ 3,330 ​ Net income available to common shareholders ​ $ 193,738 ​ $ 206,231 ​ $ 166,060 ​ $ 68,113 ​ $ 59,544 ​ Credit Quality Data: ​ ​ ​ ​ ​ ​ Nonperforming loans ​ $ 26,683 ​ $ 761 ​ $ 6,321 ​ $ 4,678 ​ $ 2,411 ​ Nonperforming loans to total loans ​ 0.36 % 0.01 % 0.11 % 0.15 % 0.12 % Nonperforming assets ​ $ 26,683 ​ $ 761 ​ $ 6,321 ​ $ 4,822 ​ $ 2,411 ​ Nonperforming assets to total assets ​ 0.21 % 0.01 % 0.07 % 0.08 % 0.06 % Allowance for credit losses to total loans ​ 0.59 % 0.54 % 0.50 % 0.52 % 0.62 % Allowance for credit losses to nonperforming loans ​ 164.95 % 4,118.79 % 435.06 % 338.65 % 526.92 % Net charge-offs/(recoveries) to average loans and loans held for sale ​ 0.01 % 0.01 % 0.00 % 0.02 % 0.01 % Per Share Data (Common Stock): (2) ​ ​ ​ ​ ​ ​ Diluted earnings per share ​ $ 4.47 ​ $ 4.76 ​ $ 3.85 ​ $ 1.58 ​ $ 1.38 ​ Dividends declared ​ $ 0.28 ​ $ 0.24 ​ $ 0.21 ​ $ 0.19 ​ $ 0.16 ​ Tangible book value (non-GAAP) ​ $ 21.88 ​ $ 17.96 ​ $ 13.45 ​ $ 9.79 ​ $ 8.33 ​ Weighted average shares outstanding ​ ​ ​ ​ ​ ​ Basic ​ 43,164,477 ​ 43,172,078 ​ 43,113,741 ​ 43,057,688 ​ 43,039,433 ​ Diluted ​ 43,316,904 ​ 43,325,303 ​ 43,167,113 ​ 43,118,561 ​ 43,086,629 ​ Shares outstanding at period end ​ 43,113,127 ​ 43,180,079 ​ 43,120,625 ​ 43,059,657 ​ 43,041,054 ​ Performance Metrics: ​ ​ ​ ​ ​ ​ Return on average assets ​ 1.99 % 2.23 % 2.12 % 1.47 % 1.71 % Return on average equity ​ 17.21 % 22.07 % 25.09 % 14.37 % 15.86 % Return on average tangible common equity (non-GAAP) ​ 22.50 % 30.10 % 34.02 % 17.56 % 17.23 % Net interest margin ​ 2.97 % 2.79 % 2.69 % 2.40 % 2.54 % Efficiency ratio (non-GAAP) ​ 30.61 % 28.80 % 27.42 % 37.38 % 36.47 % Loans and loans held for sale to deposits ​ 103.08 % 101.15 % 116.17 % 93.50 % 89.46 % Capital Ratios—Merchants Bancorp: ​ ​ ​ ​ ​ ​ Tangible common equity to tangible assets (non-GAAP) ​ 7.5 % 6.9 % 6.0 % 6.6 % 9.3 % Tier 1 common equity to risk-weighted assets ​ 7.7 % n/a % n/a % 7.4 % 10.6 % Tier 1 leverage ratio/CBLR ​ 11.7 % 10.4 % 8.6 % 9.4 % 10.0 % Tier 1 capital to risk-weighted assets ​ 11.7 % n/a % n/a % 11.3 % 11.9 % Total capital to risk-weighted assets ​ 12.2 % n/a % n/a % 11.6 % 12.3 % Capital Ratios—Merchants Bank Only: ​ ​ ​ ​ ​ ​ Tier 1 common equity to risk-weighted assets ​ 11.3 % n/a % n/a % 11.7 % 12.9 % CBLR (Tier 1 leverage ratio) ​ 11.3 % 10.3 % 8.7 % 9.7 % 11.0 % Tier 1 capital to risk-weighted assets ​ 11.3 % n/a % n/a % 11.7 % 12.9 % Total capital to risk-weighted assets ​ 11.7 % n/a % n/a % 12.0 % 13.3 % ​ ​ (1) The Company adopted FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) on January 1, 2022.
Biggest changeSelected Financial Data. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At or for the Year Ended December 31, (Dollars in thousands, except per share data) 2023 2022 2021 2020 2019 Balance Sheet Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Assets ​ $ 16,952,516 ​ $ 12,615,227 ​ $ 11,278,638 ​ $ 9,645,375 ​ $ 6,371,928 ​ Loans held for investment ​ 10,199,553 ​ 7,470,872 ​ 5,782,663 ​ 5,535,426 ​ 3,028,310 ​ Allowance for credit losses (1) ​ (71,752) ​ (44,014) ​ (31,344) ​ (27,500) ​ (15,842) ​ Loans held for sale ​ 3,144,756 ​ 2,910,576 ​ 3,303,199 ​ 3,070,154 ​ 2,093,789 ​ Deposits ​ 14,061,460 ​ 10,071,345 ​ 8,982,613 ​ 7,408,066 ​ 5,478,075 ​ Total liabilities ​ 15,251,432 ​ 11,155,488 ​ 10,123,229 ​ 8,834,754 ​ 5,718,200 ​ Total shareholders' equity ​ 1,701,084 ​ 1,459,739 ​ 1,155,409 ​ 810,621 ​ 653,728 ​ Tangible common shareholders' equity (non-GAAP) ​ 1,184,889 ​ 943,100 ​ 775,708 ​ 579,847 ​ 421,438 ​ Income Statement Data: ​ ​ ​ ​ ​ ​ Interest Income ​ $ 1,077,798 ​ $ 480,833 ​ $ 311,886 ​ $ 282,790 ​ $ 211,995 ​ Interest Expense ​ 629,727 ​ 162,282 ​ 33,892 ​ 58,644 ​ 89,697 ​ Net interest income ​ 448,071 ​ 318,551 ​ 277,994 ​ 224,146 ​ 122,298 ​ Provision for credit losses ​ 40,231 ​ 17,295 ​ 5,012 ​ 11,838 ​ 3,940 ​ Noninterest income ​ 114,668 ​ 125,936 ​ 157,333 ​ 127,473 ​ 47,089 ​ Noninterest expense ​ 174,601 ​ 136,050 ​ 125,385 ​ 96,424 ​ 63,313 ​ Income before taxes ​ 347,907 ​ 291,142 ​ 304,930 ​ 243,357 ​ 102,134 ​ Provision for income taxes ​ 68,673 ​ 71,421 ​ 77,826 ​ 62,824 ​ 24,805 ​ Net income ​ 279,234 ​ 219,721 ​ 227,104 ​ 180,533 ​ 77,329 ​ Preferred stock dividends ​ 34,670 ​ 25,983 ​ 20,873 ​ 14,473 ​ 9,216 ​ Net income available to common shareholders ​ $ 244,564 ​ $ 193,738 ​ $ 206,231 ​ $ 166,060 ​ $ 68,113 ​ Credit Quality Data: ​ ​ ​ ​ ​ ​ Nonperforming loans ​ $ 82,015 ​ $ 26,683 ​ $ 761 ​ $ 6,321 ​ $ 4,678 ​ Nonperforming loans to total loans ​ 0.80 % 0.36 % 0.01 % 0.11 % 0.15 % Nonperforming assets ​ $ 82,015 ​ $ 26,683 ​ $ 761 ​ $ 6,321 ​ $ 4,822 ​ Nonperforming assets to total assets ​ 0.48 % 0.21 % 0.01 % 0.07 % 0.08 % Allowance for credit losses to total loans ​ 0.70 % 0.59 % 0.54 % 0.50 % 0.52 % Allowance for credit losses to nonperforming loans ​ 87.49 % 164.95 % 4,118.79 % 435.06 % 338.65 % Net charge-offs/(recoveries) to average loans and loans held for sale ​ 0.08 % 0.01 % 0.01 % 0.00 % 0.02 % Per Share Data (Common Stock): ​ ​ ​ ​ ​ ​ Diluted earnings per share ​ $ 5.64 ​ $ 4.47 ​ $ 4.76 ​ $ 3.85 ​ $ 1.58 ​ Dividends declared ​ $ 0.32 ​ $ 0.28 ​ $ 0.24 ​ $ 0.21 ​ $ 0.19 ​ Tangible book value (non-GAAP) ​ $ 27.40 ​ $ 21.88 ​ $ 17.96 ​ $ 13.45 ​ $ 9.79 ​ Weighted average shares outstanding ​ ​ ​ ​ ​ ​ Basic ​ 43,224,042 ​ 43,164,477 ​ 43,172,078 ​ 43,113,741 ​ 43,057,688 ​ Diluted ​ 43,345,799 ​ 43,316,904 ​ 43,325,303 ​ 43,167,113 ​ 43,118,561 ​ Shares outstanding at period end ​ 43,242,928 ​ 43,113,127 ​ 43,180,079 ​ 43,120,625 ​ 43,059,657 ​ Performance Metrics: ​ ​ ​ ​ ​ ​ Return on average assets ​ 1.85 % 1.99 % 2.23 % 2.12 % 1.47 % Return on average equity ​ 17.63 % 17.21 % 22.07 % 25.09 % 14.37 % Return on average tangible common equity (non-GAAP) ​ 22.92 % 22.50 % 30.10 % 34.02 % 17.56 % Net interest margin ​ 3.06 % 2.97 % 2.79 % 2.69 % 2.40 % Efficiency ratio (non-GAAP) ​ 31.03 % 30.61 % 28.80 % 27.42 % 37.38 % Loans and loans held for sale to deposits ​ 94.90 % 103.08 % 101.15 % 116.17 % 93.50 % Capital Ratios—Merchants Bancorp: ​ ​ ​ ​ ​ ​ Tangible common equity to tangible assets (non-GAAP) ​ 7.0 % 7.5 % 6.9 % 6.0 % 6.6 % Tier 1 common equity to risk-weighted assets ​ 7.8 % 7.7 % n/a % n/a % 7.4 % Tier 1 leverage ratio/CBLR ​ 10.1 % 11.7 % 10.4 % 8.6 % 9.4 % Tier 1 capital to risk-weighted assets ​ 11.1 % 11.7 % n/a % n/a % 11.3 % Total capital to risk-weighted assets ​ 11.6 % 12.2 % n/a % n/a % 11.6 % Capital Ratios—Merchants Bank Only: ​ ​ ​ ​ ​ ​ Tier 1 common equity to risk-weighted assets ​ 10.9 % 11.3 % n/a % n/a % 11.7 % Tier 1 capital to average assets ​ 10.1 % 11.3 % 10.3 % 8.7 % 9.7 % Tier 1 capital to risk-weighted assets ​ 10.9 % 11.3 % n/a % n/a % 11.7 % Total capital to risk-weighted assets ​ 11.5 % 11.7 % n/a % n/a % 12.0 % ​ ​ (1) The Company adopted FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) on January 1, 2022.
The reconciliation from consolidated assets per GAAP to tangible assets is comprised solely of consolidated assets less goodwill and intangibles totaling $17.0 million at December 31, 2022, $17.6 million at December 31, 2021, $18.1 million at December 31, 2020, $19.6 million at December 31, 2019 and $21.0 million for the year ended December 31, 2018.
The reconciliation from consolidated assets per GAAP to tangible assets is comprised solely of consolidated assets less goodwill and intangibles totaling $16.6 million at December 31, 2023, $17.0 million at December 31, 2022, $17.6 million at December 31, 2021, $18.1 million at December 31, 2020 and $19.6 million for the year ended December 31, 2019.
A reconciliation of GAAP to non-GAAP financial measures is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, (Dollars in thousands) 2022 2021 2020 2019 2018 Tangible common shareholders’ equity: ​ ​ ​ ​ ​ ​ Shareholders’ equity per GAAP ​ $ 1,459,739 ​ $ 1,155,409 ​ $ 810,621 ​ $ 653,728 ​ $ 421,237 ​ Less: goodwill & intangibles ​ (17,031) ​ (17,552) ​ (18,128) ​ (19,644) ​ (21,019) ​ Tangible shareholders’ equity ​ 1,442,708 ​ 1,137,857 ​ 792,493 ​ 634,084 ​ 400,218 ​ Less: preferred stock ​ (499,608) ​ (362,149) ​ (212,646) ​ (212,646) ​ (41,581) ​ Tangible common shareholders’ equity ​ $ 943,100 ​ $ 775,708 ​ $ 579,847 ​ $ 421,438 ​ $ 358,637 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average tangible common shareholders’ equity: ​ ​ ​ ​ ​ ​ Average shareholders’ equity per GAAP ​ $ 1,276,443 ​ $ 1,028,834 ​ $ 719,630 ​ $ 537,946 ​ $ 396,350 ​ Less: average goodwill & intangibles ​ (17,293) ​ (17,841) ​ (18,899) ​ (20,243) ​ (9,265) ​ Less: average preferred stock ​ (398,182) ​ (325,904) ​ (212,646) ​ (129,881) ​ (41,581) ​ Average tangible common shareholders’ equity ​ $ 860,968 ​ $ 685,089 ​ $ 488,085 ​ $ 387,822 ​ $ 345,504 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tangible assets: ​ ​ ​ ​ ​ ​ Assets per GAAP ​ $ 12,615,227 ​ $ 11,278,638 ​ $ 9,645,375 ​ $ 6,371,928 ​ $ 3,884,163 ​ Less: goodwill & intangibles ​ (17,031) ​ (17,552) ​ ​ (18,128) ​ (19,644) ​ (21,019) ​ Tangible assets ​ $ 12,598,196 ​ $ 11,261,086 ​ $ 9,627,247 ​ $ 6,352,284 ​ $ 3,863,144 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Ending Common Shares ​ ​ 43,113,127 ​ ​ 43,180,079 ​ ​ 43,120,625 ​ ​ 43,059,657 ​ ​ 43,041,054 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tangible book value per common share ​ $ 21.88 ​ $ 17.96 ​ $ 13.45 ​ $ 9.79 ​ $ 8.33 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on average tangible common equity ​ ​ 22.50 % ​ 30.10 % ​ 34.02 % ​ 17.56 % ​ 17.23 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tangible common equity to tangible assets ​ 7.5 % 6.9 % 6.0 % 6.6 % 9.3 % ​ 35 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ ​ December 31, ​ ​ 2022 2021 2020 2019 2018 ​ Net income as reported per GAAP ​ $ 219,721 ​ $ 227,104 ​ $ 180,533 ​ $ 77,329 ​ $ 62,874 ​ Less: preferred stock dividends ​ ​ (25,983) ​ ​ (20,873) ​ ​ (14,473) ​ ​ (9,216) ​ ​ (3,330) ​ Net income available to common shareholders ​ $ 193,738 ​ $ 206,231 ​ $ 166,060 ​ $ 68,113 ​ $ 59,544 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Efficiency ratio (based on all GAAP metrics): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest expense ​ $ 136,050 ​ $ 125,385 ​ $ 96,424 ​ $ 63,313 ​ $ 50,900 ​ Net interest income (before provision for credit losses) ​ ​ 318,551 ​ ​ 277,994 ​ ​ 224,146 ​ ​ 122,298 ​ ​ 89,971 ​ Noninterest income ​ ​ 125,936 ​ ​ 157,333 ​ ​ 127,473 ​ ​ 47,089 ​ ​ 49,585 ​ Total revenues for efficiency ratio ​ $ 444,487 ​ $ 435,327 ​ $ 351,619 ​ $ 169,387 ​ $ 139,556 ​ Efficiency ratio ​ 30.61 % 28.80 % 27.42 % 37.38 % 36.47 % ​ ​ ​
A reconciliation of GAAP to non-GAAP financial measures is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, (Dollars in thousands) 2023 2022 2021 2020 2019 Tangible common shareholders’ equity: ​ ​ ​ ​ ​ ​ Shareholders’ equity per GAAP ​ $ 1,701,084 ​ $ 1,459,739 ​ $ 1,155,409 ​ $ 810,621 ​ $ 653,728 ​ Less: goodwill & intangibles ​ (16,587) ​ (17,031) ​ (17,552) ​ (18,128) ​ (19,644) ​ Tangible shareholders’ equity ​ 1,684,497 ​ 1,442,708 ​ 1,137,857 ​ 792,493 ​ 634,084 ​ Less: preferred stock ​ (499,608) ​ (499,608) ​ (362,149) ​ (212,646) ​ (212,646) ​ Tangible common shareholders’ equity ​ $ 1,184,889 ​ $ 943,100 ​ $ 775,708 ​ $ 579,847 ​ $ 421,438 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average tangible common shareholders’ equity: ​ ​ ​ ​ ​ ​ Average shareholders’ equity per GAAP ​ $ 1,583,485 ​ $ 1,276,443 ​ $ 1,028,834 ​ $ 719,630 ​ $ 537,946 ​ Less: average goodwill & intangibles ​ (16,801) ​ (17,293) ​ (17,841) ​ (18,899) ​ (20,243) ​ Less: average preferred stock ​ (499,608) ​ (398,182) ​ (325,904) ​ (212,646) ​ (129,881) ​ Average tangible common shareholders’ equity ​ $ 1,067,076 ​ $ 860,968 ​ $ 685,089 ​ $ 488,085 ​ $ 387,822 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tangible assets: ​ ​ ​ ​ ​ ​ Assets per GAAP ​ $ 16,952,516 ​ $ 12,615,227 ​ $ 11,278,638 ​ $ 9,645,375 ​ $ 6,371,928 ​ Less: goodwill & intangibles ​ (16,587) ​ (17,031) ​ ​ (17,552) ​ (18,128) ​ (19,644) ​ Tangible assets ​ $ 16,935,929 ​ $ 12,598,196 ​ $ 11,261,086 ​ $ 9,627,247 ​ $ 6,352,284 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Ending Common Shares ​ ​ 43,242,928 ​ ​ 43,113,127 ​ ​ 43,180,079 ​ ​ 43,120,625 ​ ​ 43,059,657 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tangible book value per common share ​ $ 27.40 ​ $ 21.88 ​ $ 17.96 ​ $ 13.45 ​ $ 9.79 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on average tangible common equity ​ ​ 22.92 % ​ 22.50 % ​ 30.10 % ​ 34.02 % ​ 17.56 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tangible common equity to tangible assets ​ 7.0 % 7.5 % 6.9 % 6.0 % 6.6 % ​ 36 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ ​ December 31, ​ ​ 2023 2022 2021 2020 2019 ​ Net income as reported per GAAP ​ $ 279,234 ​ $ 219,721 ​ $ 227,104 ​ $ 180,533 ​ $ 77,329 ​ Less: preferred stock dividends ​ ​ (34,670) ​ ​ (25,983) ​ ​ (20,873) ​ ​ (14,473) ​ ​ (9,216) ​ Net income available to common shareholders ​ $ 244,564 ​ $ 193,738 ​ $ 206,231 ​ $ 166,060 ​ $ 68,113 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Efficiency ratio (based on all GAAP metrics): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest expense ​ $ 174,601 ​ $ 136,050 ​ $ 125,385 ​ $ 96,424 ​ $ 63,313 ​ Net interest income (before provision for credit losses) ​ ​ 448,071 ​ ​ 318,551 ​ ​ 277,994 ​ ​ 224,146 ​ ​ 122,298 ​ Noninterest income ​ ​ 114,668 ​ ​ 125,936 ​ ​ 157,333 ​ ​ 127,473 ​ ​ 47,089 ​ Total revenues for efficiency ratio ​ $ 562,739 ​ $ 444,487 ​ $ 435,327 ​ $ 351,619 ​ $ 169,387 ​ Efficiency ratio ​ 31.03 % 30.61 % 28.80 % 27.42 % 37.38 % ​ ​ ​
The reconciliation from shareholders’ equity per GAAP to tangible common shareholders’ equity is comprised solely of goodwill and intangibles totaling $17.0 million at December 31, 2022, $17.6 million at December 31, 2021, $18.1 million at December 31, 2020, $19.6 million at December 31, 2019 and $21.0 million for the year ended December 31, 2018.
These non-GAAP financial measures include presentation of tangible common shareholders’ equity, tangible book value per share, tangible common shareholders’ equity to tangible assets, return on average tangible common equity, and efficiency ratio. 35 Table of Contents The reconciliation from shareholders’ equity per GAAP to tangible common shareholders’ equity is comprised of goodwill and intangibles totaling $16.6 million at December 31, 2023, $17.0 million at December 31, 2022, $17.6 million at December 31, 2021, $18.1 million at December 31, 2020 and $19.6 million for the year ended December 31, 2019, as well as preferred stock totaling $499.6 million at December 31, 2023, $499.6 million at December 31, 2022, $362.1 million at December 31, 2021, $212.6 million at December 31, 2020 and $212.6 million at December 31, 2019.
ASU 2016-13 replaces the allowance for loan losses that used incurred loss impairment methodology in 2021-2018.
ASU 2016-13 replaces the allowance for loan losses that used incurred loss impairment methodology in 2021-2019. ​ NON-GAAP FINANCIAL MEASURES Some of the financial measures included in this report are not measures of financial performance recognized by GAAP. Our management uses these non-GAAP financial measures in its analysis of our performance.
Removed
(2) The number of shares and per share amounts have been restated to reflect the 3-for-2 common stock split, effective on January 17, 2022. ​ NON-GAAP FINANCIAL MEASURES Some of the financial measures included in this report are not measures of financial performance recognized by GAAP. Our management uses these non-GAAP financial measures in its analysis of our performance.
Removed
These non-GAAP 34 Table of Contents financial measures include presentation of tangible common shareholders’ equity, tangible book value per share, tangible common shareholders’ equity to tangible assets, return on average tangible common equity, and efficiency ratio.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

158 edited+78 added−58 removed42 unchanged
Biggest changeThe following tables present the Company’s capital ratios at December 31, 2022 and 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount Required ​ Minimum Amount ​ ​ ​ ​ ​ ​ ​ ​ for Adequately ​ To Be 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. ​ ​ 57 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount Required ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ for Adequately ​ ​ ​ ​ ​ Actual ​ Capitalized (1) ​ ​ ​ ​ ​ Amount Ratio ​ Amount Ratio ​ ​ ​ (Dollars in thousands) ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CBLR (Tier 1) capital (1) (to average assets) ​ ​ ​ ​ ​ ​ ​ (i.e., CBLR - leverage ratio) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company ​ ​ ​ ​ ​ ​ $ 1,138,090 10.4 % $ 928,731 > 8.5 % Merchants Bank ​ ​ ​ ​ ​ ​ ​ 1,088,621 10.3 % 901,188 > 8.5 % FMBI ​ ​ ​ ​ ​ ​ 28,958 9.7 % 25,499 > 8.5 % (1) As defined by regulatory agencies. ​ On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020.
Biggest changeThe following tables present the Company’s capital ratios at December 31, 2023 and 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount to be Well ​ Minimum Amount ​ ​ ​ ​ ​ ​ ​ ​ Capitalized with ​ To Be Well ​ ​ ​ Actual ​ Basel III Buffer (1) ​ Capitalized (1) ​ ​ Amount Ratio Amount Ratio ​ Amount Ratio ​ ​ (Dollars in thousands) ​ December 31, 2023 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total capital (1) (to risk-weighted assets) ​ ​ ​ ​ ​ ​ ​ Company ​ $ 1,772,195 11.6 % $ 1,598,260 10.5 % $ — N/A % Merchants Bank ​ ​ 1,724,505 11.5 % 1,577,434 10.5 % 1,502,318 10.0 % FMBI ​ 40,613 21.1 % 20,209 10.5 % 19,247 10.0 % Tier I capital (1) (to risk-weighted assets) ​ ​ ​ ​ Company ​ 1,686,202 11.1 % 1,293,830 8.5 % — N/A % Merchants Bank ​ ​ 1,639,171 10.9 % 1,276,970 8.5 % 1,201,854 8.0 % FMBI ​ 39,953 20.8 % 16,360 8.5 % 15,398 8.0 % Common Equity Tier I capital (1) (to risk-weighted assets) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company ​ 1,186,594 7.8 % 1,065,507 7.0 % — N/A % Merchants Bank ​ ​ 1,639,171 10.9 % 1,051,623 7.0 % 976,507 6.5 % FMBI ​ 39,953 20.8 % 13,473 7.0 % 12,511 6.5 % Tier I capital (1) (to average assets) ​ ​ ​ ​ ​ ​ Company ​ 1,686,202 10.1 % 832,706 5.0 % — N/A % Merchants Bank ​ ​ 1,639,171 10.1 % 815,191 5.0 % 815,191 5.0 % FMBI ​ 39,953 11.5 % 17,391 5.0 % 17,391 5.0 % ​ (1) As defined by regulatory agencies. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 61 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount to be Well ​ Minimum Amount ​ ​ ​ ​ ​ ​ ​ ​ Capitalized with ​ To Be Well ​ ​ ​ Actual ​ Basel III Buffer (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 10.5 % $ — N/A % Merchants Bank ​ ​ 1,427,738 11.7 % 975,853 10.5 % 1,219,817 10.0 % FMBI ​ 34,769 11.3 % 24,703 10.5 % 30,878 10.0 % Tier I capital (1) (to risk-weighted assets) ​ ​ ​ ​ Company ​ 1,452,456 11.7 % 744,662 8.5 % — N/A % Merchants Bank ​ ​ 1,372,941 11.3 % 731,890 8.5 % 975,853 8.0 % FMBI ​ 34,054 11.0 % 18,527 8.5 % 24,703 8.0 % Common Equity Tier I capital (1) (to risk-weighted assets) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Company ​ 952,848 7.7 % 558,497 7.0 % — N/A % Merchants Bank ​ ​ 1,372,941 11.3 % 548,917 7.0 % 792,881 6.5 % FMBI ​ 34,054 11.0 % 13,895 7.0 % 20,071 6.5 % Tier I capital (1) (to average assets) ​ ​ ​ ​ ​ ​ Company ​ 1,452,456 11.7 % 497,604 5.0 % — N/A % Merchants Bank ​ ​ 1,372,941 11.3 % 487,511 5.0 % 609,389 5.0 % FMBI ​ 34,054 10.7 % 12,702 5.0 % 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.
Asset Levels. We manage our asset levels based upon forecasted closings or fundings within our business segments to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios.
We manage our asset levels based upon forecasted closings or fundings within our business segments to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios.
Under CBLR, if a qualifying depository institution or depository institution holding company elected to use such measure, such institution or holding company was be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeded a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio could not go 100 basis points below the then applicable threshold, and would not be required to calculate and report risk-based capital ratios.
Under CBLR, if a qualifying depository institution or depository institution holding company elected to use such measure, such institution or holding company was considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeded a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio could not go 100 basis points below the then applicable threshold, and would not be required to calculate and report risk-based capital ratios.
Yields have been calculated on a pre-tax basis.
Yields have been calculated on a pre-tax basis.
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).
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 Reset 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).
Gain on sale of loans includes placement and origination fees, capitalized servicing rights, trading gains and losses, gains and losses on derivatives and other related income. Loan servicing fees are collected as payments are received for loans in the servicing portfolio and reduced by amortization on servicing rights.
Gain on sale of loans includes placement and origination fees, capitalized servicing rights, trading gains and losses, gains and losses on certain derivatives and other related income. Loan servicing fees are collected as payments are received for loans in the servicing portfolio and reduced by amortization on servicing rights.
Loan origination expenses include third party processing for financing activities and loan-related origination expenses. Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses. Equipment expense includes furniture, fixtures and equipment related expenses. Professional fees include legal, accounting, consulting and other outsourcing arrangements.
Loan origination and servicing expenses include third party processing for financing activities and loan-related origination expenses. Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses. Equipment expense includes furniture, fixtures and equipment related expenses. Professional fees include legal, accounting, consulting and other outsourcing arrangements.
Dividends on the Series A Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $1.75 per share through March 31, 2024. After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 460.5 basis points per year.
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.
On September 27, 2022, the Company issued 5,200,000 depositary shares, each representing a 1/40th interest in a share of its 8.25% Fixed-to-Floating 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).
On September 27, 2022, the Company issued 5,200,000 depositary shares, each representing a 1/40th interest in a share of its 8.25% Fixed Rate Reset 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).
Additional details are provided in the ACL-Loans portion of the Comparison of Financial Condition at December 31, 2022 and December 31, 2021. Because there could be unforeseen future losses, the Company continues to monitor the situation and may need to adjust future expectations as developments occur. Issuance and Redemption of Preferred Stock.
Additional details are provided in the ACL-Loans portion of the Comparison of Financial Condition at December 31, 2023 and December 31, 2022. Because there could be unforeseen future losses, the Company continues to monitor the situation and may need to adjust future expectations as developments occur. Issuance and Redemption of Preferred Stock.
Management believes, as of December 31, 2022 and December 31, 2021, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject. ​ As of December 31, 2022 and December 31, 2021, 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.
Management believes, as of December 31, 2023 and December 31, 2022, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject. ​ As of December 31, 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. Contractual obligations The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities as of December 31, 2022.
There are no conditions or events since that notification that management believes have changed the Company’s, Merchants Bank’s, or FMBI’s category. Contractual obligations The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities as of December 31, 2023.
After deducting underwriting discounts, commissions, and direct offering expenses, the Company received total net proceeds of $120.8 million. 55 Table of Contents 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 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.
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 expected credit losses on loans.
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.
Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes 43 Table of Contents 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.
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 44 Table of Contents multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume.
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.
On September 30, 2022, the Company issued an additional 500,000 shares of Series D Preferred Stock to the underwriters 60 Table of Contents 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.
Noninterest expense includes, among other things: (a) salaries and employee benefits, including commissions; (b) loan origination expenses; (c) occupancy and equipment expense; (d) professional fees; (e) FDIC insurance expense; (f) technology expense; and (g) other general and administrative expenses. Salaries and employee benefits includes commissions, other compensation, employee benefits and employment tax expenses for our personnel.
Noninterest expense includes, among other things: (a) salaries and employee benefits, including commissions; (b) loan origination and servicing expenses; (c) occupancy and equipment expense; (d) professional fees; (e) FDIC insurance expense; (f) technology expense; and (g) other general and administrative expenses. Salaries and employee benefits includes commissions, other compensation, employee benefits and employer tax expenses for our personnel.
We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Additionally, 54 Table of Contents the Company’s business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.
We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Additionally, the Company’s business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.
The valuation model is from an independent third party and it incorporates assumptions that market participants would use in estimating future net servicing cash flows, such as the cost to service, the discount rate, the custodial assets 59 Table of Contents earnings rate, an inflation rate, ancillary income, prepayment speeds, prepayment penalties, and default rates and losses.
The valuation model is from an independent third party and it incorporates assumptions that market participants would use in estimating future net servicing cash flows, such as the cost to service, the discount rate, the custodial assets earnings rate, an inflation rate, ancillary income, prepayment speeds, prepayment penalties, and default rates and losses.
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 preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption. 56 Table of Contents Common Shares/Dividends .
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 preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
The allowance also incorporates reasonable and supportable forecasts. There have been no changes to the credit quality components used to assess risk during the year ended December 31, 2022. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance also incorporates reasonable and supportable forecasts. There have been no changes to the credit quality components used to assess risk during the twelve months ended December 31, 2023. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Discussion and Analysis of the Company’s financial condition and the results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 is contained in Item 7 of Form 10-K for the year ended December 31, 2021 filed with the SEC on March 4, 2022.
Discussion and Analysis of the Company’s financial condition and the results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is contained in Item 7 of Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023.
As a result, the cost of borrowings increased from a base rate of 1.56% and 0.36%, to an effective rate of 2.13% and 0.86% for the year ended December 31, 2022 and 2021, respectively. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 42 Table of Contents 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.
As a result, the cost of borrowings increased from a base rate of 8.36% and 1.56%, to an effective rate of 8.37% and 2.13% for the year ended December 31, 2023 and 2022, respectively. 43 Table of Contents 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.
As of December 31, 2022, the Company’s market capitalization was well above its book value, despite stock market volatility. Given the continued strength of the Company’s results, we do not believe there exists any impairment to goodwill or intangible assets. Servicing Rights.
As of December 31, 2023, the Company’s market capitalization was well above its book value, despite stock 55 Table of Contents market volatility. Given the continued strength of the Company’s results, we do not believe there exists any impairment to goodwill or intangible assets. Servicing Rights.
Growth moderated and declined during the years ended December 31, 2021 and 2022 in this line of business as interest rates increased, and it may not resume until 2024.
Growth moderated and declined during the years ended December 31, 2021, 2022 and 2023 in this line of business as interest rates increased, and it may not resume until rates stabilize or decline in 2024.
We manage our regulatory capital based upon factors that include: (a) the level and quality of capital and our overall financial condition; (b) the trend and volume of problem assets; (c) the dollar amount of servicing rights as a percentage of capital; (d) the level and quality of earnings; (e) the risk exposures in our balance sheet; and (f) other factors.
We manage our regulatory capital based upon factors that include: (a) the level and quality of capital and our overall financial condition; (b) risk weighting of our assets; (c) the trend and volume of problem assets; (d) the dollar amount of servicing rights as a percentage of capital; (e) the level and quality of earnings; (f) the risk exposures on our balance sheet as well as off-balance sheet exposures; and (g) other factors.
From July 2019 thru May 2022, the Board of Governors of the Federal Reserve System (“Federal Reserve”) continued to reduce interest rates, leading to historically low overnight interest rates in the range of 0.0% to 0.25%, which was the lowest the rates had been since 2009.
Prior to May 2022, the Board of Governors of the Federal Reserve System (“Federal Reserve”) continued to reduce interest rates, leading to historically low overnight interest rates in the range of 0.0% to 0.25%, which was the lowest the rates had been since 2009.
The fair value increase recorded during the year ended December 31, 2022 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. Other Assets and Receivables.
The fair value increase recorded during the year ended December 31, 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 and the value of custodial deposits.
In addition to the stated rate, the borrowing term on subordinated debt includes payment of an amount equal to a portion of the net income 53 Table of Contents from our warehouse structured finance arrangements, which is a driver of the higher average interest rate during the period relative to the stated rate at end of period. Total Shareholders’ Equity.
In addition to the stated rate, the borrowing term on subordinated debt includes payment of an amount equal to a portion of the net income from our warehouse structured finance arrangements, which is a driver of the higher average interest rate during the period relative to the stated rate at end of period. ​ ​ ​ 57 Table of Contents Other Liabilities.
The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies.
The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies.
Net cash provided by (used in) investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $(2.9) billion and $(474.3) million for the years ended December 31, 2022 and 2021, 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 $(3.3) billion and $(2.9) billion for the years ended December 31, 2023 and 2022, respectively.
Net interest income. Net interest income represents interest income less interest expense. We generate interest income from interest (net of deferred origination fees received and costs paid, which are amortized over the expected life of the loans) and fees received on interest-earning assets, including loans, investment securities, cash, and dividends on FHLB stock we own.
We generate interest income from interest (net of deferred origination fees received and costs paid, which are amortized over the expected life of the loans) and fees received on interest-earning assets, including loans, investment securities, cash, and dividends on FHLB stock we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings.
Servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Servicing rights resulting from the sale or securitization of loans originated by us are initially measured at fair value at the date of transfer. We have elected to initially and subsequently measure the servicing rights for mortgage loans using the fair value method.
Servicing rights resulting from the sale or securitization of loans originated by us are initially measured at fair value at the date of transfer. We have elected to initially and subsequently measure the servicing rights for mortgage loans using the fair value method.
At December 31, 2022, we had $3.5 billion in outstanding commitments to extend credit that are subject to credit risk and $4.5 billion in 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.
At December 31, 2023, we had $4.0 billion in outstanding commitments to extend credit that are subject to credit risk and $3.7 billion in outstanding commitments subject to certain performance criteria and cancellation by the Company, including loans pending closing, unfunded construction draws, and unfunded warehouse repurchase agreements.
This compared to the 49% industry decrease in single-family residential loan volumes from the year ended December 31, 2022 to the year ended December 31, 2021, according to the Mortgage Bankers Association. Total assets in the Mortgage Warehousing segment decreased 37%, to $2.5 billion at December 31, 2022, compared to $4.0 billion at December 31, 2021. Banking.
This compared to the 29% industry decrease in single-family residential loan volumes from the year ended December 31, 2023 to the year ended December 31, 2022, according to the Mortgage Bankers Association. Total assets in the Mortgage Warehousing segment increased 79%, to $4.5 billion at December 31, 2023, compared to $2.5 billion at December 31, 2022. Banking.
Net cash provided by (used in) operating activities was $975.8 million and $(49.2) million for the years ended December 31, 2022 and 2021, respectively.
Net cash (used in) provided by operating activities was $(356.4) million and $975.8 million for the years ended December 31, 2023 and 2022, respectively.
Recent Developments and Material Trends Economic and Interest Rate Environment. The results of our operations are highly dependent on economic conditions, mortgage volumes, and market interest rates. Residential mortgage volumes fluctuate based on market interest rates, economic conditions, and the credit parameters set by the GSEs and other market participants.
Recent Developments and Material Trends Economic and Interest Rate Environment. The results of our operations are highly dependent on economic conditions, mortgage volumes, and market interest rates. Residential mortgage volumes fluctuate based on market interest rates, economic conditions, and the credit parameters set by government agencies, such as Fannie Mae, Freddie Mac, and Ginnie Mae, and other market participants.
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. ​ See “Company Overview and Our Business Segments,” in Item 1 “ Business ”, “Operating Segment Analysis for the Years Ended December 31, 2022 and 2021” in Item 7 “Management’s Discussion and Analysis of Financial Condition and the Results of Operations”, and “Segment Information,” in Note 26 of our Consolidated Financial Statements for further information about our segments.
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. ​ See “Company Overview and Our Business Segments,” in Item 1 “ Business ”, “Operating Segment Analysis for the Years Ended December 31, 2023 and 2022” in Item 7 “Management’s Discussion and Analysis of Financial Condition and the Results of Operations”, and “Segment Information,” in Note 26: Segment Information for further information about our segments. 38 Table of Contents Primary Factors We Use to Evaluate Our Business As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition.
The following table sets forth certain information regarding our borrowings at the dates and for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At or For the Years ​ ​ Ended ​ ​ December 31, (Dollars in thousands) 2022 2021 2020 ​ ​ ​ Balance at end of period ​ $ 930,392 ​ $ 1,033,954 ​ $ 1,348,256 ​ Average balance during period ​ 594,423 ​ 657,573 ​ 650,892 ​ Maximum outstanding at any month end ​ 1,440,904 ​ 1,103,443 ​ 1,761,113 ​ Weighted average interest rate at end of period (1) ​ 4.06 % 0.27 % 0.28 % Average interest rate during period ​ 2.13 % 0.86 % 0.98 % (1) The weighted-average interest rate at the end of the period reflects the stated interest rates on the borrowings.
The following table sets forth certain information regarding our borrowings at the dates and for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At or For the Years ​ ​ Ended ​ ​ December 31, (Dollars in thousands) 2023 2022 2021 ​ ​ ​ Balance at end of period ​ $ 964,127 ​ $ 930,392 ​ $ 1,033,954 ​ Average balance during period ​ 627,516 ​ 594,423 ​ 657,573 ​ Maximum outstanding at any month end ​ 1,654,075 ​ 1,440,904 ​ 1,103,443 ​ Weighted average interest rate at end of period (1) ​ 7.51 % 4.06 % 0.27 % Average interest rate during period ​ 8.37 % 2.13 % 0.86 % (1) The weighted-average interest rate at the end of the period reflects the stated interest rates on the borrowings.
Total assets in the Banking segment increased 38%, to $9.6 billion at December 31, 2022, compared to $6.9 billion at December 31, 2021. See “Our Business Segments,” in Item 1 “Business”, and Note 26, “Segment Information,” in the notes to our Consolidated Financial Statements for further information about our segments.
Total assets in the Banking segment increased 23%, to $11.8 billion at December 31, 2023, compared to $9.6 billion at December 31, 2022. See “Our Business Segments,” in Item 1 “Business”, and Note 26: Segment Information, for further information about our segments.
The average yield of money market accounts was 1.84% for the year ended December 31, 2022, which was a 107 basis point increase compared to 0.77% for year ended December 31, 2021.
The average yield of money market accounts was 4.51% for the year ended December 31, 2023, which was a 267 basis point increase compared to 1.84% for year ended December 31, 2022.
These represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as GNMA mortgage- backed securities with a firm investor commitment to purchase the securities. The 73% decline was primarily due to the industry decline in volume of loans that had not yet settled with government agencies. Securities Available for Sale.
These represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as Ginnie Mae or other agency mortgage- backed securities with a firm investor commitment to purchase the securities. The 28% decrease was primarily due to a decrease in the volume of loans that had not yet settled with government agencies.
This compared to the 49% industry decrease in single-family residential loan volumes from the year ended December 31, 2022 to the same period in 2021, 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 decreased by $1.1 billion, or 39%, to $1.8 billion, compared to $2.9 billion for the year ended December 31, 2021.
This compared to the 29% industry decrease in single-family residential loan volumes from the year ended December 31, 2023 to the same period in 2022, according to an estimate of industry volume by the Mortgage Bankers Association. ● The total volume of loans originated and acquired through our multi-family business was $6.2 billion, a decrease of $2.7 billion, or 30%, compared to $8.9 billion for the year ended December 31, 2022.
The average balance of money market accounts of $2.7 billion for the year ended December 31, 2022 increased $387.5 million, or 17%, compared to the year ended December 31, 2021.
The average balance of money market accounts of $2.8 billion for the year ended December 31, 2023 increased $153.8 million, or 6%, compared to $2.7 billion for the year ended December 31, 2022.
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 $3.1 billion described below, these totaled 54% of its $12.6 billion total assets at December 31, 2022.
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 repurchase agreements included in loans receivable. Taken together with its unused borrowing capacity of $6.0 billion described above, these totaled $10.6 billion, or 62%, of its $17.0 billion total assets at December 31, 2023.
As inflation increased throughout 2022, on the heels of the COVID-19 pandemic, the Federal Reserve responded by rapidly increasing interest rates to the highest levels seen since January 2008, as the Federal funds rate reached a range of 4.5 – 4.75% as of February 2023.
As inflation increased throughout 2022 and 2023, on the heels of the COVID-19 pandemic, the Federal Reserve responded by rapidly increasing interest rates to the highest levels seen since January 2008, as the Federal funds rate steadily increased and stabilized to 5.33% as of December 31, 2023.
The average balance of certificates of deposit of $1.6 billion for the year ended December 31, 2022 increased $874.3 million, or 127%, compared to the year ended December 31, 2021.
The average balance of certificates of deposit of $4.6 billion for the year ended December 31, 2023 increased $3.0 billion, or 194%, compared to $1.6 billion for the year ended December 31, 2022.
Financial Condition As of December 31, 2022, we had approximately $12.6 billion in total assets, $10.1 billion in deposits, and $1.5 billion in total shareholders’ equity. Total assets as of December 31, 2022 included approximately $226.2 million of cash and cash equivalents, $2.9 billion of loans held for sale and $7.4 billion of loans receivable, net of ACL-Loans.
Financial Condition As of December 31, 2023, we had approximately $17.0 billion in total assets, $14.1 billion in deposits, and $1.7 billion in total shareholders’ equity. Total assets as of December 31, 2023 included approximately $584.4 million of cash and cash equivalents, $3.1 billion of loans held for sale and $10.1 billion of loans receivable, net of ACL-Loans.
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.
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.
Thirty-year mortgage rates rose over 7% during 2022 for the first time since 2002, per Federal Reserve data. The lower interest rates in 2020 contributed to the significant loan growth we experienced for the year ended December 31, 2020, particularly related to single family mortgage refinancing activity that increased net interest income and noninterest income in our Mortgage Warehousing segment.
The lower interest rates in 2020 contributed to the significant loan growth we experienced for the year ended December 31, 2020, particularly related to single family mortgage refinancing activity that increased net interest income and noninterest income in our Mortgage Warehousing segment.
For more information about our loan commitments, unused lines of credit and standby letters of credit, see Note 25 of the Notes to our Consolidated Financial Statements.
For more information about our loan commitments, unused lines of credit and standby letters of credit, see Note 25: Commitments and Credit Risk .
As we anticipate that our loan portfolio overall will continue to grow in 2023, we could similarly expect the provision to increase, but could also be influenced by any changes to problem loans in our portfolio or the loan type mix within the portfolio.
As we anticipate that our loan portfolio overall will continue to grow in 2024, we could expect the provision to increase, but could also be influenced by any changes to problem loans in our portfolio or the loan type mix within the portfolio. It could also be influenced by external market factors, such as interest rates and economic activity.
The level of the ACL is believed to be adequate to absorb innate 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.
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 segmenting loans with similar risk characteristics.
There are restrictions on the types of securities we hold, as these are funded by certain custodial deposits where we set the cost of deposits based on the yield of the related securities.
There are some restrictions on the types of securities we hold, particularly for those that are funded by certain multi-family custodial deposits where we set the cost of deposits based on the yield of the related securities.
The increase in loan servicing fees reflected a positive fair market value adjustment of $14.0 million on servicing rights for 46 Table of Contents the year ended December 31, 2022 compared to a positive fair market value adjustment of $4.1 million for the year ended December 31, 2021.
Loan servicing fees reflected a positive fair market value adjustment of $3.9 million on servicing rights for the year ended December 31, 2023 compared to a positive fair market value adjustment of $14.0 million for the year ended December 31, 2022.
After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 456.9 basis points per year. In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero.
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.
Premises and Equipment, Net. Premises and equipment, net, increased $4.2 million, or 14%, to $35.4 million at December 31, 2022, compared to $31.2 million at December 31, 2021. The increase was primarily due to an increase in office buildings acquired to support business growth. Goodwill. Goodwill of $15.8 million at December 31, 2022 remained unchanged compared to December 31, 2021.
Premises and equipment, net, of $42.3 million at December 31, 2023 increased $6.9 million, or 19%, compared to $35.4 million at December 31, 2022. The increase was primarily due to an increase in land acquired to expand our headquarters and to support business growth. Goodwill. Goodwill of $15.8 million at December 31, 2023 remained unchanged compared to December 31, 2022.
We recorded a provision for credit losses of $17.3 million for the year ended December 31, 2022, an increase of $12.3 million, compared to $5.0 million for the year ended December 31, 2021.
We recorded a total provision for credit losses of $40.2 million for the year ended December 31, 2023, an increase of $22.9 million, compared to $17.3 million for the year ended December 31, 2022.
The interest rate spread of 2.72% for the year ended December 31, 2022 decreased 1 basis point compared to 2.73% for the year ended December 31, 2021. Our net interest margin increased 18 basis points, to 2.97%, for the year ended December 31, 2022 from 2.79% for the year ended December 31, 2021. Interest Income.
The interest rate spread of 2.51% for the year ended December 31, 2023, decreased 21 basis points compared to 2.72% for the year ended December 31, 2022. Our net interest margin increased nine basis points, to 3.06%, for the year ended December 31, 2023 from 2.97% for the year ended December 31, 2022. Interest Income.
The $17.3 million provision for credit losses consisted of $13.5 million for the ACL-Loans, $2.6 million for the allowance for off-balance sheet credit exposures (“ACL-OBCEs”) and $1.2 million for ACL-Guarantees. The ACL-Loans was $44.0 million, or 0.59% of loans receivable at December 31, 2022, compared to $31.3 million, or 0.54% of loans receivable at December 31, 2021.
The $40.2 million total provision for credit losses consisted of $37.5 million for the ACL-Loans and $2.7 million for the allowance for off-balance sheet credit exposures (“ACL-OBCEs”). The ACL-Loans was $71.8 million, or 0.70% of loans receivable at December 31, 2023, compared to $44.0 million, or 0.59% of loans receivable at December 31, 2022.
For additional information on the impact of CECL see Note 5: Loans and Allowance for Credit Losses on Loans. 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.
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. Premises and Equipment, Net.
The following tables show the average balance amounts and the average contractual rates paid on our deposits for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ For the Year Ended ​ ​ For the Year Ended ​ ​ December 31, 2022 ​ ​ December 31, 2021 ​ ​ December 31, 2020 ​ Average Average ​ Average Average ​ Average Average (Dollars in thousands) ​ Balance ​ Rate ​ ​ Balance ​ Rate ​ ​ Balance ​ Rate Noninterest-bearing demand ​ $ 453,387 — % ​ $ 678,494 — % ​ $ 455,976 — % Interest-bearing demand ​ 4,149,942 1.66 % ​ 4,589,269 0.14 % ​ 3,233,128 0.37 % Money market savings ​ 2,651,532 1.84 % ​ 2,264,063 0.77 % ​ 1,465,820 1.14 % Savings ​ 240,481 0.23 % ​ 208,467 0.07 % ​ 176,573 0.09 % Certificates of deposit ​ 1,561,261 2.00 % ​ 687,002 0.66 % ​ 1,730,259 1.36 % Total ​ $ 9,056,603 1.65 % ​ $ 8,427,295 0.34 % ​ $ 7,061,756 0.74 % ​ The following table shows time deposits of $250,000 or more by time remaining until maturity: ​ ​ ​ ​ ​ At December 31, (Dollars in thousands) ​ 2022 ​ ​ Three months or less ​ $ 74,657 Over three months through six months ​ 29,637 Over six months through one year ​ 70,588 Over one year to three years ​ 11,552 Over three years ​ — Total ​ $ 186,434 ​ Borrowings.
The following tables show the average balance amounts and the average contractual rates paid on our deposits for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Year Ended ​ ​ For the Year Ended ​ ​ For the Year Ended ​ ​ December 31, 2023 ​ ​ December 31, 2022 ​ ​ December 31, 2021 ​ Average Average ​ Average Average ​ Average Average (Dollars in thousands) ​ Balance ​ Rate ​ ​ Balance ​ Rate ​ ​ Balance ​ Rate Noninterest-bearing demand ​ $ 337,723 — % ​ $ 453,387 — % ​ $ 678,494 — % Interest-bearing demand ​ 4,717,300 4.59 % ​ 4,149,942 1.66 % ​ 4,589,269 0.14 % Money market savings ​ 2,805,284 4.51 % ​ 2,651,532 1.84 % ​ 2,264,063 0.77 % Savings ​ 239,509 0.52 % ​ 240,481 0.23 % ​ 208,467 0.07 % Certificates of deposit ​ 4,589,312 5.08 % ​ 1,561,261 2.00 % ​ 687,002 0.66 % Total ​ $ 12,689,128 4.55 % ​ $ 9,056,603 1.65 % ​ $ 8,427,295 0.34 % ​ The following table shows time deposits of $250,000 or more by time remaining until maturity: ​ ​ ​ ​ ​ At December 31, (Dollars in thousands) ​ 2023 ​ ​ Three months or less ​ $ 70,573 Over three months through six months ​ 79,973 Over six months through one year ​ 154,558 Over one year to three years ​ 106,073 Over three years ​ — Total ​ $ 411,177 ​ Borrowings.
FDIC insurance expense represents the assessments that we pay to the FDIC for deposit insurance. Technology expense includes data processing fees paid to our third-party data processing system provider and other data service providers. Other general and administrative expenses include expenses associated with travel, meals, training, supplies and postage. Noninterest expenses generally increase as we grow our business.
Technology expense includes data processing fees paid to our third-party data processing system provider and other data service providers. 39 Table of Contents Other general and administrative expenses include expenses associated with servicing expense, advertising, marketing, travel, meals, training, supplies, and postage, among other miscellaneous expenses. Noninterest expenses generally increase as we grow our business.
Total assets also include $154.2 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.
Total assets also included $110.6 million of mortgage loans in process of securitization that represent pre-sold multi-family rental real estate loan originations in primarily Fannie Mae, Freddie Mac, or Ginnie Mae mortgage backed securities pending settlements that typically occur within 30 days.
The average balance of interest-bearing checking accounts of $4.1 billion for the year ended December 31, 2022 decreased $439.3 million, or 10%, compared to $4.6 billion for the year ended December 31, 2021.
The average balance of interest-bearing checking accounts of $4.7 billion for the year ended December 31, 2023 increased $567.4 million, or 14%, compared to $4.1 billion for the year ended December 31, 2022.
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.
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.
Supporting this expectation are industry forecasts from the Mortgage Bankers Association, which has forecasted a 49% decrease in single-family residential mortgage volume, to $2.245 trillion for 2022, from $3.991 trillion in 2021, and a decrease of 17%, to $1.873 trillion in 2023, followed by an increase to $2.279 trillion for 2024. COVID-19 Pandemic.
Supporting this expectation are industry forecasts from the Mortgage Bankers Association, which has forecasted a 22% increase in single-family residential mortgage volume, to $2.001 trillion for 2024, from $1.639 trillion in 2023, and an increase of 17%, to $2.339 trillion in 2025, followed by an increase to $2.436 trillion for 2026.
Noninterest expenses have increased significantly over the past few years as we have grown organically, and as we have built out and modernized our operational infrastructure and implemented our plan to build an efficient, technology-driven mortgage banking operation with significant operational capacity for growth. 38 Table of Contents Financial Condition The primary factors we use to evaluate and manage our financial condition are asset levels, liquidity, capital and asset quality.
Noninterest expenses have increased significantly over the past few years as we have grown organically, and as we have built out and modernized our operational infrastructure and implemented our plan to build an efficient, technology-driven mortgage banking operation with significant operational capacity for growth. Return on Average Equity.
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”). Interest-bearing deposits increased $1.4 billion, or 17%, to $9.7 billion at December 31, 2022, and noninterest-bearing deposits decreased $314.6 million, or 49%, to $326.9 million at December 31, 2022.
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”). 56 Table of Contents Interest-bearing deposits increased $3.8 billion, or 39%, to $13.5 billion at December 31, 2023, and noninterest-bearing deposits increased $193.2 million, or 59%, to $520.1 million at December 31, 2023.
Asset Quality ​ Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $26.7 million, or 0.36% of total loans, at December 31, 2022, compared to $0.8 million, or 0.01% of total loans, at December 31, 2021.
The effective tax rate was 19.7% for the year ended December 31, 2023 and 24.5% for the year ended December 31, 2022. ​ Asset Quality ​ Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $82.0 million, or 0.80% of total loans, at December 31, 2023, compared to $26.7 million, or 0.36% of total loans, at December 31, 2022.
Interest expense on borrowings increased $7.0 million, or 124%, to $12.6 million for the year ended December 31, 2022 from $5.6 million for the year ended December 31, 2021. The increase was due primarily to a 127 basis point increase in the average cost of borrowings to 2.13%, compared to 0.86% for the year ended December 31, 2021.
Interest expense on borrowings increased $39.9 million, or 316%, to $52.5 million for the year ended December 31, 2023 from $12.6 million for the year ended December 31, 2022. The increase reflected a 624 basis point increase in the average cost of borrowings to 8.37%, compared to 2.13% for the year ended December 31, 2022.
The $433.5 million increase in multi-family financing was due to significantly 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 $870.6 million increase in multi-family financing loan balances was primarily in the construction and bridge portfolios that were generated through our multi-family segment and will remain on our balance sheet until they convert to permanent financing or are otherwise paid off over the next one to three years.
We also believe that heightened regulatory capital requirements will make it more difficult for even well-capitalized, healthy community banks to grow in their communities by taking advantage of opportunities in their markets that result as the economy improves. We believe these trends will favor community banks that have sufficient capital, a diversified business model and a strong deposit franchise.
We expect that troubled community banks will continue to face significant challenges when attempting to raise capital. We also believe that heightened regulatory capital requirements will make it more difficult for even well-capitalized, healthy community banks to grow in their communities by taking advantage of opportunities in their markets that result as the economy improves.
The following table presents an analysis of the ACL-Loans for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At or For the Year ​ ​ Ended December 31, (Dollars in thousands) 2022 2021 2020 ​ ​ ​ Balance at beginning of period ​ $ 31,344 ​ $ 27,500 ​ $ 15,842 ​ Less charge-offs: ​ ​ ​ ​ Residential real estate ​ (4) ​ (2) ​ (31) ​ Commercial and commercial real estate ​ (1,238) ​ (1,184) ​ (319) ​ Consumer and margin ​ (15) ​ (6) ​ (11) ​ Total charge-offs ​ (1,257) ​ (1,192) ​ (361) ​ Plus recoveries: ​ ​ ​ ​ Residential real estate ​ — ​ — ​ 75 ​ Commercial and commercial real estate ​ 746 ​ — ​ 106 ​ Consumer and margin ​ 7 ​ 24 ​ — ​ Total recoveries ​ 753 ​ 24 ​ 181 ​ Net (charge-offs) recoveries ​ (504) ​ (1,168) ​ (180) ​ Transfers out: ​ ​ ​ ​ Impact of adopting CECL ​ ​ (299) ​ ​ — ​ ​ — ​ Provision for credit losses ​ 13,473 ​ 5,012 ​ 11,838 ​ Balance at end of period ​ $ 44,014 ​ $ 31,344 ​ $ 27,500 ​ Ratios: ​ ​ ​ ​ Total net charge-offs to average loans outstanding ​ (0.01) % (0.01) % — % Net (charge-offs) recoveries to average loans outstanding: Residential real estate ​ ​ — % ​ — % ​ (0.01) % Net (charge-offs) recoveries to average loans outstanding: Commercial and commercial real estate ​ ​ (0.07) % ​ (0.26) % ​ (0.05) % Net (charge-offs) recoveries to average loans outstanding: Consumer and margin ​ ​ (0.06) % ​ 0.14 % ​ (0.07) % Allowance for credit losses to nonperforming loans at end of period ​ 164.95 % 4,118.79 % 435.06 % Allowance for credit losses to total loans at end of period ​ 0.59 % 0.54 % 0.50 % 50 Table of Contents The following table presents an analysis of the ACL-Loans for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, ​ ​ 2022 ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ Percent of ​ ​ ​ ​ ​ Percent of ​ ​ ​ ​ ​ Percent of ​ ​ ​ ​ Percent of ​ Loans in ​ ​ ​ Percent of ​ Loans in ​ ​ ​ Percent of ​ Loans in ​ ​ ​ ​ Allowance ​ Category ​ ​ ​ Allowance ​ Category ​ ​ ​ Allowance ​ Category ​ ​ ​ ​ to Total ​ to Total ​ ​ ​ to Total ​ to Total ​ ​ ​ to Total ​ to Total (Dollars in thousands) Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Mortgage warehouse lines of credit ​ $ 1,249 3 % 6 % $ 1,955 6 % 14 % $ 4,018 15 % 29 % Residential real estate ​ 7,029 16 % 16 % 4,170 13 % 15 % 3,334 12 % 12 % Multi-family financing ​ 16,781 39 % 43 % 14,084 46 % 46 % 12,140 44 % 41 % Healthcare financing ​ ​ 9,882 ​ 22 % 21 % ​ 4,461 ​ 14 % 14 % ​ 2,591 ​ 9 % 9 % Commercial and commercial real estate ​ 8,326 19 % 13 % 5,879 19 % 9 % 4,641 17 % 7 % Agricultural production and real estate ​ 565 1 % 1 % 657 2 % 2 % 636 2 % 2 % Consumer and margin ​ 182 - % - % 138 - % - % 140 1 % - % Total allowance for credit losses ​ $ 44,014 100 % 100 % $ 31,344 100 % 100 % $ 27,500 100 % 100 % ​ The following table sets forth the amounts of nonperforming loans and nonperforming assets at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At ​ ​ December 31, (Dollars in thousands) 2022 2021 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonaccrual loans: ​ ​ ​ ​ Residential real estate ​ $ 245 ​ $ 362 ​ $ 578 ​ Healthcare financing ​ ​ 21,783 ​ ​ — ​ ​ — ​ Commercial and commercial real estate ​ 4,390 ​ — ​ 2,052 ​ Agricultural production and real estate ​ 147 ​ 158 ​ 181 ​ Consumer and margin ​ 6 ​ 4 ​ 12 ​ Total ​ 26,571 ​ 524 ​ 2,823 ​ Accruing loans 90 days or more past due: ​ ​ ​ ​ Residential real estate ​ 96 ​ 22 ​ 69 ​ Commercial and commercial real estate ​ — ​ 149 ​ 1,240 ​ Agricultural production and real estate ​ — ​ 30 ​ 2,181 ​ Consumer and margin ​ 16 ​ 36 ​ 8 ​ Total ​ 112 ​ 237 ​ 3,498 ​ Total nonperforming loans ​ $ 26,683 ​ $ 761 ​ $ 6,321 ​ Real estate owned ​ — ​ — ​ — ​ Total nonperforming assets ​ $ 26,683 ​ $ 761 ​ $ 6,321 ​ Troubled debt restructurings: ​ ​ ​ ​ Commercial and commercial real estate ​ $ 3,778 ​ $ 4,961 ​ $ 3,999 ​ Agricultural production and real estate ​ — ​ — ​ 180 ​ Total ​ $ 3,778 ​ $ 4,961 ​ $ 4,179 ​ Ratios: ​ ​ ​ ​ Total nonperforming loans to total loans ​ 0.36 % 0.01 % 0.11 % Total nonperforming loans to total assets ​ 0.21 % 0.01 % 0.07 % Total nonperforming assets to total assets ​ 0.21 % 0.01 % 0.07 % Total nonperforming loans and TDRs to total loans ​ 0.41 % 0.10 % 0.19 % Total nonperforming loans and TDRs to total assets ​ 0.24 % 0.05 % 0.11 % Total nonperforming assets and TDRs to total assets ​ 0.24 % 0.05 % 0.11 % ​ 51 Table of Contents The ACL-Loans of $44.0 million at December 31, 2022 increased $12.7 million compared to December 31, 2021, primarily reflecting increases associated with loan growth and portfolio mix.
The following table presents an analysis of the ACL-Loans for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At or For the Year ​ ​ Ended December 31, (Dollars in thousands) 2023 2022 2021 ​ ​ ​ Balance at beginning of period ​ $ 44,014 ​ $ 31,344 ​ $ 27,500 ​ Less charge-offs: ​ ​ ​ ​ Residential real estate ​ (34) ​ (4) ​ (2) ​ Multi-family financing ​ (8,400) ​ — ​ — ​ Commercial and commercial real estate ​ (1,356) ​ (1,238) ​ (1,184) ​ Consumer and margin ​ (1) ​ (15) ​ (6) ​ Total charge-offs ​ (9,791) ​ (1,257) ​ (1,192) ​ Plus recoveries: ​ ​ ​ ​ Commercial and commercial real estate ​ 41 ​ 746 ​ — ​ Consumer and margin ​ — ​ 7 ​ 24 ​ Total recoveries ​ 41 ​ 753 ​ 24 ​ Net (charge-offs) recoveries ​ (9,750) ​ (504) ​ (1,168) ​ Transfers out: ​ ​ ​ ​ Impact of adopting CECL ​ ​ — ​ ​ (299) ​ ​ — ​ Provision for credit losses ​ 37,488 ​ 13,473 ​ 5,012 ​ Balance at end of period ​ $ 71,752 ​ $ 44,014 ​ $ 31,344 ​ Ratios: ​ ​ ​ ​ Total net charge-offs to average loans outstanding ​ (0.08) % (0.01) % (0.01) % Net charge-offs to average loans outstanding: Multi-family financing ​ ​ (0.24) % ​ — % ​ — % Net (charge-offs) recoveries to average loans outstanding: Commercial and commercial real estate ​ ​ (0.10) % ​ (0.07) % ​ (0.26) % Net (charge-offs) recoveries to average loans outstanding: Consumer and margin ​ ​ (0.01) % ​ (0.06) % ​ 0.14 % Allowance for credit losses to nonperforming loans at end of period ​ 87.49 % 164.95 % 4,118.79 % Allowance for credit losses to total loans at end of period ​ 0.70 % 0.59 % 0.54 % 53 Table of Contents The following table presents an analysis of the ACL-Loans for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, ​ ​ 2023 ​ 2022 ​ 2021 ​ ​ ​ ​ ​ ​ Percent of ​ ​ ​ ​ ​ Percent of ​ ​ ​ ​ ​ Percent of ​ ​ ​ ​ Percent of ​ Loans in ​ ​ ​ Percent of ​ Loans in ​ ​ ​ Percent of ​ Loans in ​ ​ ​ ​ Allowance ​ Category ​ ​ ​ Allowance ​ Category ​ ​ ​ Allowance ​ Category ​ ​ ​ ​ to Total ​ to Total ​ ​ ​ to Total ​ to Total ​ ​ ​ to Total ​ to Total (Dollars in thousands) Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Mortgage warehouse repurchase agreements ​ $ 2,070 3 % 7 % $ 1,249 3 % 6 % $ 1,955 6 % 14 % Residential real estate ​ 7,323 10 % 13 % 7,029 16 % 16 % 4,170 13 % 15 % Multi-family financing ​ 26,874 38 % 40 % 16,781 39 % 43 % 14,084 46 % 46 % Healthcare financing ​ ​ 22,454 ​ 31 % 23 % ​ 9,882 ​ 22 % 21 % ​ 4,461 ​ 14 % 14 % Commercial and commercial real estate ​ 12,243 17 % 16 % 8,326 19 % 13 % 5,879 19 % 9 % Agricultural production and real estate ​ 619 1 % 1 % 565 1 % 1 % 657 2 % 2 % Consumer and margin ​ 169 - % - % 182 - % - % 138 - % - % Total allowance for credit losses ​ $ 71,752 100 % 100 % $ 44,014 100 % 100 % $ 31,344 100 % 100 % 54 Table of Contents The following table sets forth the amounts of nonperforming loans and nonperforming assets at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At ​ ​ December 31, (Dollars in thousands) 2023 2022 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonaccrual loans: ​ ​ ​ ​ Residential real estate ​ $ 1,486 ​ $ 245 ​ $ 362 ​ Multi-family financing ​ 39,608 ​ — ​ — ​ Healthcare financing ​ ​ 28,783 ​ ​ 21,783 ​ ​ — ​ Commercial and commercial real estate ​ 3,820 ​ 4,390 ​ — ​ Agricultural production and real estate ​ 147 ​ 147 ​ 158 ​ Consumer and margin ​ 3 ​ 6 ​ 4 ​ Total ​ 73,847 ​ 26,571 ​ 524 ​ Accruing loans 90 days or more past due: ​ ​ ​ ​ Residential real estate ​ 894 ​ 96 ​ 22 ​ Healthcare financing ​ ​ 7,216 ​ ​ — ​ ​ — ​ Commercial and commercial real estate ​ 43 ​ — ​ 149 ​ Agricultural production and real estate ​ — ​ — ​ 30 ​ Consumer and margin ​ 15 ​ 16 ​ 36 ​ Total ​ 8,168 ​ 112 ​ 237 ​ Total nonperforming loans ​ $ 82,015 ​ $ 26,683 ​ $ 761 ​ Real estate owned ​ — ​ — ​ — ​ Total nonperforming assets ​ $ 82,015 ​ $ 26,683 ​ $ 761 ​ Modifications/TDR 1 : ​ ​ ​ ​ Commercial and commercial real estate ​ $ 3,778 ​ $ 3,778 ​ $ 4,961 ​ Agricultural production and real estate ​ — ​ — ​ — ​ Total ​ $ 3,778 ​ $ 3,778 ​ $ 4,961 ​ Ratios: ​ ​ ​ ​ Total nonperforming loans to total loans ​ 0.80 % 0.36 % 0.01 % Total nonperforming loans to total assets ​ 0.48 % 0.21 % 0.01 % Total nonperforming assets to total assets ​ 0.48 % 0.21 % 0.01 % Total nonperforming loans and modifications/TDRs to total loans ​ 0.84 % 0.41 % 0.10 % Total nonperforming loans and modifications/TDRs to total assets ​ 0.51 % 0.24 % 0.05 % Total nonperforming assets and modifications/TDRs to total assets ​ 0.51 % 0.24 % 0.05 % ​ (1) 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”).
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. Additional information regarding ACL-Loans estimates can be found in Note 1: Nature of Operations and Summary of Significant Accounting Policies and Note 5: Loans and Allowance for Credit Losses on Loans. Servicing Rights.
Additional information regarding ACL-Loans estimates can be found in Note 1: Nature of Operations and Summary of Significant Accounting Policies and Note 5: Loans and Allowance for Credit Losses on Loans. ​ Servicing Rights. Servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets.
The growth was primarily due to a $14.3 million increase in noninterest income reflecting a $20.1 million increase in loan servicing fees, and a $7.4 million increase in other income that was partially offset by a $16.1 million decrease in gain on sale of loans, as sales to the secondary market declined.
A $31.9 million decrease in noninterest income reflected a $34.4 million decrease in gain on sale of loans, as sales to the secondary market declined, and a $4.9 million decrease in other noninterest income. This was partially offset by a $3.4 million increase in loan servicing fees and a $4.0 million increase in syndication and asset management fees.
As described further in Item 1 - “Supervision and Regulation—Merchants Bank and FMBI—Capital Requirements and Basel III” the federal regulators finalized and adopted rules regarding the community bank leverage ratio (“CBLR”) in November 2019.
We believe these trends will favor community banks that have sufficient capital, a diversified business model and a strong deposit franchise. As described further in Item 1 - “Supervision and Regulation—Merchants Bank—Capital Requirements and Basel III” the federal regulators finalized and adopted rules regarding the community bank leverage ratio (“CBLR”) in November 2019.
Syndication fee income is recognized at the point in time when investor equity capital is obtained primarily to acquire qualifying investments in low-income housing tax credit projects for its funds or debt funds. Related asset management fees for syndicated funds are recognized over time. Noninterest expense.
Fair value adjustments to the value of servicing rights are also included in noninterest income. Mortgage warehouse fees are accrued at the time of funding. Syndication fee income is recognized at the point in time when investor equity capital is obtained primarily to acquire qualifying investments in low-income housing tax credit projects for its funds.
We expect to continue incurring increased noninterest expense attributable to general and administrative expenses related to building out and modernizing our operational infrastructure, marketing and other administrative expenses to execute our strategic initiatives, expenses to hire additional personnel and other costs required to continue our growth. Comparison of Operating Results for the Years Ended December 31, 2022 and 2021 General.
We expect to continue incurring increased noninterest expense attributable to general and administrative expenses related to building out and modernizing our operational infrastructure, marketing, and other administrative expenses to execute our strategic initiatives, as well as expenses to hire additional personnel and other costs required to continue our growth. We also expect costs to increase with additional regulatory compliance requirements.
Other assets and receivables of $157.4 million at December 31, 2022 increased $64.5 million, or 69%, compared to $92.9 million at December 31, 2021. The increase was primarily due to the increase for investments in low-income housing tax credit funds and investments in joint ventures that are involved in single-family, multi-family, and healthcare debt financing.
The 95% increase in other assets and receivables was primarily due to investments in low-income housing tax credit funds and investments in joint ventures that are involved in single-family, multi-family, and healthcare debt financing.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

9 edited+1 added−1 removed7 unchanged
Biggest changeAn 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.
Biggest changeEffective 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. 64 Table of Contents 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.
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 December 31, 2022 projects that as interest rates increase (decrease) immediately, the economic value of equity position will be expected to decrease (increase).
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 December 31, 2023 projects that as interest rates increase (decrease) immediately, the economic value of equity position will be expected to decrease (increase).
Treasuries, LIBOR 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 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.
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. 60 Table of Contents Income Simulation and Economic Value Analysis.
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 .
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. ​ 62 Table of Contents
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. ​ 66 Table of Contents
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.
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.
At the years ended December 31, 2022, 2021 and 2020 we estimated that we are within policy limits set by our board of directors for the −200, −100, +100, and +200 basis point scenarios. The EVE results for Merchants Bank included in the following table reflect the analysis used quarterly by management.
At the years ended December 31, 2023, 2022, and 2021 we are within policy limits set by our board of directors for the −200, −100, +100, and +200 basis point scenarios. ​ ​ ​ ​ ​ ​ ​ 65 Table of Contents The EVE results for Merchants Bank included in the following table reflect the analysis used quarterly by management.
The following table presents NII at Risk for Merchants Bank as of December 31, 2022, 2021, and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income Sensitivity ​ Twelve Months Forward ​ - 200 - 100 + 100 + 200 ​ (Dollars in thousands) December 31, 2022: ​ ​ ​ ​ ​ Dollar change $ (96,861) ​ $ (48,581) ​ $ 37,232 ​ $ 74,094 ​ Percent change (23.8) % (11.9) % 9.2 % 18.2 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021: ​ ​ ​ ​ Dollar change $ (13,810) ​ $ (17,991) ​ $ 21,895 ​ $ 65,010 ​ Percent change (4.9) % (6.3) % 7.7 % 22.9 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020: ​ ​ ​ ​ Dollar change $ (11,899) ​ $ (10,651) ​ $ 21,027 ​ $ 50,305 ​ Percent change (4.5) % (4.0) % 8.0 % 19.1 % ​ 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.
The following table presents NII at Risk for Merchants Bank as of December 31, 2023, 2022, and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income Sensitivity ​ Twelve Months Forward ​ - 200 - 100 + 100 + 200 ​ (Dollars in thousands) December 31, 2023: ​ ​ ​ ​ ​ Dollar change $ (73,311) ​ $ (36,576) ​ $ 29,601 ​ $ 57,294 ​ Percent change (15.0) % (7.5) % 6.0 % 11.7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022: ​ ​ ​ ​ Dollar change $ (96,861) ​ $ (48,581) ​ $ 37,232 ​ $ 74,094 ​ Percent change (23.8) % (11.9) % 9.2 % 18.2 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021: ​ ​ ​ ​ Dollar change $ (13,810) ​ $ (17,991) ​ $ 21,895 ​ $ 65,010 ​ Percent change (4.9) % (6.3) % 7.7 % 22.9 % ​ 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.
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) December 31, 2022: ​ ​ ​ ​ ​ Dollar change $ 22,855 ​ $ 11,640 ​ $ (10,925) ​ $ (26,385) ​ Percent change 1.6 % 0.8 % (0.8) % (1.9) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021: ​ ​ ​ ​ Dollar change $ 3,703 ​ $ 42,983 ​ $ (6,817) ​ $ (6,288) ​ Percent change 0.3 % 4.0 % (0.6) % (0.6) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020: ​ ​ ​ ​ Dollar change $ 100,236 ​ $ 113,045 ​ $ (20,958) ​ $ (27,259) ​ Percent change 12.8 % 14.4 % (2.7) % (3.5) % ​ 61 Table of Contents 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.
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) December 31, 2023: ​ ​ ​ ​ ​ Dollar change $ 180,864 ​ $ 92,793 ​ $ (34,800) ​ $ (79,455) ​ Percent change 10.8 % 5.5 % (2.1) % (4.7) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022: ​ ​ ​ ​ Dollar change $ 22,855 ​ $ 11,640 ​ $ (10,925) ​ $ (26,385) ​ Percent change 1.6 % 0.8 % (0.8) % (1.9) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021: ​ ​ ​ ​ Dollar change $ 3,703 ​ $ 42,983 ​ $ (6,817) ​ $ (6,288) ​ Percent change 0.3 % 4.0 % (0.6) % (0.6) % ​ 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.
Removed
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.
Added
Treasuries or SOFR. 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.

Other MBINM 10-K year-over-year comparisons