Merchants Bancorp (MBIN) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and the Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the accompanying notes included elsewhere in this report.

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.

This discussion and analysis contains forward-looking statements that are subject to known and unknown risks and uncertainties that could cause our results to differ materially from our expectations. Actual results and the timing of events may differ significantly from those expressed or implied by such forward-looking statements due to a number of factors, including those set forth under Item 1 - “ Special Note Regarding Forward Looking Statements,” Item 1A - “Risk Factors,” and elsewhere in this report. We assume no obligation to update any of these forward-looking statements.

Financial Highlights for the Year Ended December 31, 2022

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Company and Business Segment Overview

We are a diversified bank holding company headquartered in Carmel, Indiana and registered under the Bank Holding Company Act of 1956, as amended. We currently operate in multiple business segments, including Multi-family Mortgage Banking that offers multi-family housing and healthcare facility financing and servicing; as well as syndicated low-income housing tax credit and debt funds; Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers portfolio lending for multi-family and healthcare facility loans, retail and correspondent residential mortgage banking, agricultural lending, Small Business Administration (“SBA”) lending and traditional community banking.

Our business consists primarily of funding low risk loans meeting underwriting standards of government programs under an originate to sell model. 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, brokered deposits, and short term borrowing. We believe that the combination of net interest income and noninterest income from the sale of low risk profile assets results in lower than industry charge offs and a lower expense base, which serves to maximize net income and higher than industry shareholder return.

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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.

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. We evaluate the comparative levels and trends of the line items in our consolidated balance sheet and income statement as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable financial institutions in our region.

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Results of operations

In addition to net income, the primary factors we use to evaluate and manage our results of operations include net interest income, noninterest income and noninterest expense.

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 incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings. Net interest income is the most significant contributor to our revenues and net income. To evaluate net interest income, we measure and monitor: (a) yields on our loans and other interest-earning assets; (b) duration on our loans, deposits, and borrowings; (c) the costs of our deposits and other funding sources; (d) our net interest margin; and (e) the regulatory risk weighting associated with the assets. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

Noninterest Income. Noninterest income consists of, among other things: (a) gain on sale of loans; (b) loan servicing fees; (c) fair value adjustments to the value of servicing rights; (d) mortgage warehouse fees; and (e) syndication and asset management fees; and (f) other noninterest income.

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. Fair value adjustments to the value of servicing rights are also included in noninterest income. Mortgage warehouse fees are recognized at the time of funding and collected at the time of sale. 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. 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.

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. 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. 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.

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Financial Condition

The primary factors we use to evaluate and manage our financial condition are asset levels, liquidity, capital and asset quality.

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. Each segment evaluates its funding needs by forecasting the fundings and sales of loans, communicating with customers on their projected funding needs, and reviewing its opportunities to add new customers.

Liquidity. We manage our liquidity based upon factors that include: (a) our amount of custodial and brokered deposits as a percentage of total deposits (b) the level of diversification of our funding sources (c) the allocation and amount of our deposits among deposit types (d) the short-term funding sources used to fund assets (e) the amount of non-deposit funding used to fund assets (f) the availability of unused funding sources; (g) off-balance sheet obligations; (h) the availability of assets to be readily converted into cash without a material loss on the investment; (i) the amount of cash and cash equivalent; (j) the repricing characteristics of our assets; (k) maturity and duration of our assets when compared to the repricing characteristics of our liabilities; (l) costs of available funding options; and (m) other factors.

Capital. 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. In addition, we have continually increased our capital through net income less dividends and equity issuances.

Asset Quality. We manage the diversification and quality of our assets based upon factors that include: (a) the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets; (b) the adequacy of our allowance for credit losses on loans (“ACL-Loans”); (c) the diversification and quality of loan and investment portfolios; (d) the extent of counterparty risks; (e) credit risk concentrations; (f) the liquidity of our assets; and (g) other factors.

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. 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. The overnight federal funds rate that the Federal Reserve uses to affect economic conditions affects the entire term structure of interest rates, so rates on longer term debt (like mortgages) also moved lower. 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. 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. 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. 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. The COVID-19 pandemic has had an ongoing global impact on nearly every aspect of daily life in the U.S. since early 2020. As infection and death rates continued to accelerate throughout 2020, many businesses and schools were forced to close or alter their way of business to ensure public safety. Businesses shifted to work-from-home arrangements for their employees, and some had to juggle new childcare and home-schooling responsibilities due to shutdowns. Despite government intervention to facilitate financial assistance and small business loans, as well as the roll-out of a vaccine in early 2021 to prevent COVID-19, many businesses suffered losses or

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closures. Personal illnesses and business closures impacted nearly every industry, including the mortgage banking industry. However, Merchants had minimal direct credit exposure on loans to consumer, commercial, and other small businesses that were most negatively impacted by COVID-19.

Regulatory Environment. We believe an important trend affecting community banks in the United States over the foreseeable future will be related to heightened regulatory capital requirements, regulatory burdens generally, including the Dodd-Frank Act and the regulations thereunder, and interest margin compression. 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. 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 and FMBI—Capital Requirements and Basel III” the federal regulators finalized and adopted rules regarding the community bank leverage ratio (“CBLR”) in November 2019. 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. 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. Accordingly, the Company has been reporting fully phased-in Basel III risk-based capital ratios since September 30, 2022.

Allowance for Credit Losses on Loans (“ACL-Loans”). One of our key operating objectives has been, and continues to be, maintenance of an appropriate level of ACL-Loans in our loan portfolio. The provision for credit losses recorded in prior years was primarily due to growth in our loan portfolio, as our historical loss rates remained very low. 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. 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. 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). The aggregate gross offering proceeds for the shares issued by the Company was $130.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.7 million paid to third parties, the Company received total net proceeds of $125.3 million. On September 30, 2022, the Company issued an additional 500,000 depositary 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 March 23, 2021, the Company issued 6,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series C Non-Cumulative Perpetual Preferred Stock, without par value (the “Series C Preferred Stock”), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $150.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $5.1 million paid to third parties, the Company received total net proceeds of $144.9 million.

On April 15, 2021, all 41,625 shares of the 8% Preferred Stock were redeemed for $41.6 million, plus unpaid dividends of $139,000. On May 6, 2021, the 8% Preferred Stock shareholders participated in a private offering to replace their redeemed shares with Series C Preferred Stock. Accordingly, 46,181 shares (1,847,233 depositary shares) of Series C Preferred Stock were issued at a price of $25 per depositary share. The total capital raised from the private offering was $46.2 million, net of $23,000 in expenses.

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Loan Sales and Securitizations. Recent growth in the loan origination pipeline has prompted the Company to seek additional avenues to effectively manage regulatory capital levels and reduce credit risk, in addition to issuing preferred stock. Accordingly, we have completed several loan sale and securitization transactions, including two that were sponsored by Freddie Mac during 2022 and one during 2021. In doing so, the Company has been able to effectively reduce its risk-weighted assets and maintain well-capitalized capital ratios. Also see Note 5: Loans and Allowance for Credit Losses on Loans.

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Stock Split. On November 17, 2021, the Company approved a 3-for-2 common stock split. Shareholders of record at the close of business on January 3, 2022 received one additional share of Merchants Bancorp common stock for every two shares owned. These additional shares were distributed on or around January 17, 2022. All previously reported shares have been restated to reflect the 3-for-2 stock split.

General and Administrative Expenses. 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. Net income for the year ended December 31, 2022 was $219.7 million, a decrease of $7.4 million, or 3%, over the net income of $227.1 million for the year ended December 31, 2021. The decrease was primarily due to a $31.4 million, or 20%, decrease in noninterest income, a $12.3 million increase in provision for credit losses, and an $10.7 million, or 9%, increase in noninterest expense, which was partially offset by a $40.6 million, or 15%, increase in net interest income and a $6.4 million, or 8%, decrease in provision for income taxes.

Net Interest Income. Net interest income increased $40.6 million, or 15%, to $318.6 million for the year ended December 31, 2022, compared to $278.0 million for the year ended December 31, 2021. The 15% increase reflected a $168.9 million, or 54%, increase in interest income from higher yields and average loan balances, partially offset by a $128.4 million, or 379%, increase in interest expense from higher interest rates and average balances of deposits. 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. Interest income increased $168.9 million, or 54%, to $480.8 million for the year ended December 31, 2022, from $311.9 million for the year ended December 31, 2021. This increase was primarily attributable to an increase in higher average yields and loan balances.

The average balance of loans, including loans held for sale, during the year ended December 31, 2022 increased $806.2 million, or 9%, to $9.3 billion compared to $8.5 billion for the year ended December 31, 2021, and the average yield on loans increased 140 basis points, to 4.85% for the year ended December 31, 2022, compared to 3.45% for the year ended December 31, 2021.

The average balance of taxable available for sale securities increased $30.3 million, or 10%, to $323.0 million for the year ended December 31, 2022, from $292.7 million for the year ended December 31, 2021, and the average yield decreased 26 basis points, to 0.87% for the year ended December 31, 2022, compared to 1.13% for the year ended December 31, 2021.

The average balance of securities held to maturity that were acquired in September and December of 2022 was $277.5 million, while the average yield was 4.46% for the year ended December 31, 2022.

The average balance of interest-earning deposits and other decreased $107.5 million, or 16%, to $561.9 million for the year ended December 31, 2022, from the year ended December 31, 2021, while the average yield increased 65 basis points, to 0.94% for the year ended December 31, 2022, compared to 0.29% for the year ended December 31, 2021.

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The average balance of mortgage loans in process of securitization decreased $240.4 million, or 49%, to $253.8 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, while the average yield increased 73 basis points, to 3.31% for the year ended December 31, 2022, compared to 2.58% for the year ended December 31, 2021.

Interest Expense. Total interest expense increased $128.4 million, or 379%, to $162.3 million for the year ended December 31, 2022, compared to $33.9 million for the year ended December 31, 2021.

Interest expense on deposits increased $121.4 million, or 430%, to $149.6 million for the year ended December 31, 2022 compared to $28.3 million for the year ended December 31, 2021. The increase was primarily due to increases in interest rates on interest-bearing checking, money market accounts and certificates of deposit accounts, as well as higher average balances for certificates of deposit and money market accounts.

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 yield of interest-bearing checking accounts was 1.66% for the year ended December 31, 2022, which was a 152 basis point increase compared to 0.14% for year ended December 31, 2021.

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 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 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 yield of certificates of deposit was 2.00% for the year ended December 31, 2022, which was a 134 basis point increase compared to 0.66% for year ended December 31, 2021.

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. The increase in average rates was partially offset by a $63.2 million, or 10%, decrease in average balance compared to the year ended December 31, 2021. Additionally, borrowings include our warehouse structured financing agreement that provides for an additional interest payment for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 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.

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The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.

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Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes

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in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.

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

Provision for Credit Losses. 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. 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 increase in the ACL-Loans compared to prior periods reflected increases associated with loan growth and portfolio mix, partially offset by a release of the $4.0 million ACL-Loans associated with the loan sale and securitizations in September and November of 2022. Additional details are provided in the ACL-Loans portion of the Comparison of Financial Condition at December 31, 2022 and 2021, and in Note 5: Loans and Allowance for Credit Losses on Loans.

The Company adopted FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL") as of January 1, 2022. This changed certain accounting policies and implemented certain accounting policy elections, related to the adoption of CECL, which also contributed to the increase in provision for credit losses during the year ended December 31, 2022.

Noninterest Income. Noninterest income decreased $31.4 million, or 20%, to $125.9 million for the year ended December 31, 2022 from $157.3 million for the year ended December 31, 2021. The decrease was primarily due to a $47.0 million, or 42%, decrease in gain on sale of loans associated with a shift in business mix to programs with lower average trade pricing in the multi-family loan portfolio, as well as lower single-family and multi-family secondary market volumes.

Partially offsetting the decrease in gain on sale was a $13.8 million, or 84%, increase in loan servicing fees to $30.2 million for year ended December 31, 2022, compared to $16.4 million for the year ended December 31, 2021.

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Included in loan servicing fees was a $19.8 million positive adjustment to the fair value of servicing rights for the year ended December 31, 2022, compared to a positive adjustment of $12.4 million for the year ended December 31, 2021.

A summary of the gain on sale of loans for the years ended December 31, 2022 and 2021 is below:

Noninterest Expense. Noninterest expense increased $10.7 million, or 9%, to $136.1 million for the year ended December 31, 2022, compared to $125.4 million for the year ended December 31, 2021. The increase was due primarily to a $3.4 million, or 4%, increase in salaries and employee benefits, including commissions, to support higher multi-family loan production volumes, as well as a $3.6 million, or 67%, increase in professional fees. Partially offsetting the increases was a $3.0 million, or 39%, decrease in loan expenses for the year ended December 31, 2022, compared to the year ended December 31, 2021. The efficiency ratio was 30.6% for the year ended December 31, 2022, compared with 28.8% for the year ended December 31, 2021.

Income Taxes. Income tax expense decreased $6.4 million, or 8%, to $71.4 million for the year ended December 31, 2022, from $77.8 million for the year ended December 31, 2021. The decrease was due primarily to a 5% decrease in pre-tax income period to period. The effective tax rate was 24.5% for the year ended December 31, 2022 and 25.5% for the year ended December 31, 2021.

Asset Quality

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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 increase was primarily due to the delinquency of one healthcare loan customer that is fully collateralized and full repayment is expected.

As a percentage of nonperforming loans, the ACL-Loans was 165.0% at December 31, 2022 compared to 4,118.8% at December 31, 2021. The changes were primarily due to increases in the nonperforming loans.

Total loans greater than 30 days past due were $39.8 million at December 31, 2022 compared to $2.6 million at December 31, 2021.

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Special Mention (Watch) loans were $137.8 million at December 31, 2022, compared to $100.8 million at December 31, 2021.

We had $753,000 of recoveries and $1.3 million of charge offs during the year ended December 31, 2022, and $24,000 of recoveries and $1.2 million of charge offs during the year ended December 31, 2021.

Operating Segment Analysis for the Years Ended December 31, 2022 and 2021

Our reportable segments are Multi-family Mortgage, Mortgage Warehousing, and Banking. As discussed in “Our Business Segments” of Item 1 and Note 26 of our Consolidated Financial Statements, our reportable segments have been determined based upon their business processes and economic characteristics. This determination also gave consideration to the structure and management of various product lines.

Our segment financial information was compiled utilizing the policies described in Note 1, “Nature of Operations and Summary of Significant Accounting Policies,” and Note 26, “Segment Information,” of the Notes to Consolidated Financial Statements included elsewhere in this report. As a result, reported segments and the financial

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information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Mortgage Warehousing and Banking segments based on Merchants Bank’s cost of funds. The provision for credit losses is allocated based on information included in our ACL-Loans analysis and specific loan data for each segment.

The Other segment presented below, in Note 26 of our Consolidated Financial Statements, and elsewhere in this report includes general and administrative expenses for provision of services to all segments, internal funds transfer pricing offsets resulting from allocations to or from the other segments, certain elimination entries, and investments in low-income housing tax credit limited partnerships.

The following table presents our primary operating results for our operating segments for the years ended December 31, 2022 and 2021.

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Multi-family Mortgage Banking. The Multi-family Mortgage Banking segment reported net income of $54.6 million for the year ended December 31, 2022, an increase of $3.1 million, or 6%, compared with $51.5 million reported for the year ended December 31, 2021. 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. The increase in loan servicing fees reflected a positive fair market value adjustment of $14.0 million on servicing rights for

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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.

Partially offsetting the increase in noninterest income was a $10.7 million increase in noninterest expenses, primarily due to an increase in salaries and employee benefits, including commissions, to support higher loan production volumes referred to in the Banking segment.

The volume of loans originated and acquired for sale in the secondary market decreased by $1.1 billion, or 39%, to $1.8 billion for the year ended December 31, 2022, compared to $2.9 billion for the year ended December 31, 2021.

Total assets in the Multi-family segment increased 19%, to $351.3 million at December 31, 2022, compared to $296.1 million at December 31, 2021.

Mortgage Warehousing. The Mortgage Warehousing segment reported net income of $48.6 million for the year ended December 31, 2022, a decrease of 49% over the $95.2 million reported for the year ended December 31, 2021. The lower net income reflected lower net interest income and mortgage warehouse fees as industry volumes declined as market interest rates increased. The volume of loans funded during the year ended December 31, 2022 amounted to $33.2 billion, a decrease of $45.1 billion, or 58%, compared to the same period in 2021. 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. The Banking segment reported net income for the year ended December 31, 2022, of $134.2 million, an increase of 48% over the $90.9 million reported for the year ended December 31, 2021. The increase was primarily due to a $93.8 million increase in net interest income that was partially offset by a decrease in noninterest income of $33.9 million, reflecting lower gains on sale of loans.

Noninterest income for the year ended December 31, 2022 included a positive fair market value adjustment of $5.8 million on single-family servicing rights compared to a positive fair market value adjustment of $8.3 million for the year ended December 31, 2021.

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.

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. 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. There were also $1.1 billion securities held to maturity that were acquired as part of securitizations described in Note 5: Loans and Allowance for Credit Losses on Loans. Additionally, there were $323.3 million of securities available for sale that are match funded with related custodial deposits. 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. Servicing rights at December 31, 2022 were $146.2 million based on the fair value of the loan servicing, which is primarily GNMA multi-family servicing rights with 10-year call protection.

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Comparison of Financial Condition at December 31, 2022 and 2021

Total Assets. Total assets increased $1.3 billion, or 12%, to $12.6 billion at December 31, 2022, from $11.3 billion at December 31, 2021. The increase was due primarily to increases in net loans receivable of $1.7 billion and securities held to maturity of $1.1 billion. Partially offsetting the increases were decreases in cash and cash equivalents of $806.5 million, mortgage loans in process of securitization of $415.0 million, and loans held for sale of $392.6 million.

Cash and Cash Equivalents. Cash and cash equivalents decreased $806.5 million, or 78%, to $226.2 million at December 31, 2022, from $1.0 billion at December 31, 2021. The 78% decrease reflected intentional reductions in cash levels to manage sources of liquidity in the most cost-effective manner.

Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization decreased $415.0 million, or 73%, to $154.2 million at December 31, 2021, from $569.2 million at December 31, 2021. 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. Securities available for sale increased $12.7 million, or 4%, to $323.3 million at December 31, 2022, from $310.6 million at December 31, 2021. The increase in securities available for sale was primarily due to purchases of $51.2 million, offset by calls, maturities, sales, and repayments of securities totaling $25.4 million during the period.

We invest in securities available for sale primarily using funds from escrow deposits held at Merchants Bank, received in connection with our multi-family mortgage servicing activities. The securities available for sale are funded by escrow custodial deposits held at the Company on loans serviced by us. This portfolio of securities is structured to achieve a favorable interest rate spread.

Securities Held to Maturity. Held to maturity securities of $1.1 billion include $871.7 million that were acquired in September 2022 as part of a private securitization of originated loans described in Note 5: Loans and Allowance for Credit Losses on Loans. The remaining securities were acquired in December 2022 as part of a securitization by an external, related, party.

The following table shows the maturity distribution and weighted average yields of the securities available for sale and held to maturity portfolio:

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FHLB stock. FHLB stock increased $9.5 million, or 32%, to $39.1 million at December 31, 2022, from $29.6 million at December 31, 2021. The increase in FHLB stock was due to additional FHLB stock being purchased to increase our borrowing capacity at FHLB. Stock ownership generally correlates to levels of borrowing.

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Loans Held for Sale. Loans held for sale, comprised primarily of single-family residential real estate loan participations that meet Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), or Ginnie Mae (“GNMA”) eligibility, decreased $392.6 million, or 12%, to $2.9 billion at December 31, 2022, from $3.3 billion at December 31, 2021. The decrease in loans held for sale was primarily due to a decrease in warehouse participations, as the industry experienced lower volume associated with the recent increase in market interest rates. Also contributing to the decrease was the September 2022 loan sale described in Note 5: Loans and Allowance for Credit Losses on Loans.

Loans Receivable, Net. The following table shows our allocation of loans held for investment as of the dates presented:

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Loans receivable, net, which are comprised of loans held for investment, increased $1.7 billion, or 29%, to $7.4 billion at December 31, 2022, compared to $5.8 billion at December 31, 2021. The increase in net loans was comprised primarily of:

The $778.2 million increase in healthcare financing was due to higher origination volume for healthcare loans generated through our multi-family segment that typically remain on our balance sheet until they convert to permanent financing or are otherwise paid off over an average of one to three years.

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The $458.5 million increase in commercial and commercial real estate was primarily due to a $287.2 million, or 37%, increase in warehouse revolving lines of credit collateralized primarily by single-family mortgage servicing rights during the period.

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 growth was partially offset by the $1.2 billion sale and private securitization in September 2022, as well as securitizations of $214.0 million and $284.2 million in May and November of 2022, as described in Note 5: Loans and Allowance for Credit Losses on Loans.

The $335.3 million increase in residential real estate loans was primarily due an increase in All-in-One®, first-lien HELOCs.

The $316.7 million decrease in mortgage warehouse lines of credit was primarily due to lower loan volume as higher interest rates have decreased demand in refinancing activity.

As of December 31, 2022, approximately 93% of the total net loans at Merchants Bank reprice within three months.

Allowance for Credit Losses on Loans (“ACL-Loans”). The following table presents an analysis of the ACL-Loans for the periods presented:

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The following table presents an analysis of the ACL-Loans for the periods presented:

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The following table sets forth the amounts of nonperforming loans and nonperforming assets at the dates indicated:

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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. 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.

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. 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. Servicing rights increased $35.9 million, or 33%, to $146.2 million at December 31, 2022, compared to $110.3 million at December 31, 2021. During the year ended December 31, 2022, additions included originated and purchased servicing of $27.1 million and a positive fair value adjustment of $19.8 million. These increases were offset by paydowns of $11.0 million. The increase in originated servicing reflected the establishment of a $6.6 million servicing right associated with the September 2022 loan sale described in Note 5: Loans and Allowance for Credit Losses on Loans. The positive fair market value adjustment reflected $5.8 million for single-family and SBA mortgages and $14.0 million for multi-family mortgages during the year ended December 31, 2022.

Servicing rights are recognized in connection with sales of loans when we retain servicing of the sold loans, as well as upon purchases of loan servicing portfolios. The servicing rights are recorded and carried at fair value. The fair value increase recorded during the 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.   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 increase also reflected the establishment of a lease right of use asset on January 1, 2022, in accordance with ASU 2016-02 - “Leases”. See Note 11: Other Assets and Receivables for additional information.

Deposits. Deposits increased $1.1 billion, or 12%, to $10.1 billion at December 31, 2022, from $9.0 billion at December 31, 2021. The 12% increase in total deposits was primarily due to a $1.8 billion increase in certificates of deposit and a $195.2 million increase in money market deposits, which was partially offset by a $896.7 million decrease in demand deposits.

We increased our use of total brokered deposits by $603.0 million, or 28%, to $2.8 billion at December 31, 2022 from $2.2 billion at December 31, 2021. Brokered deposits represented 27% of total deposits at December 31, 2022, compared to 24% of total deposits at December 31, 2021.

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Although our brokered deposits are short-term in nature, they may be more rate sensitive compared to other sources of funding. In the future, those depositors may not replace their brokered deposits with us as they mature, or we may have to pay a higher rate of interest to keep those deposits or to replace them with other deposits or other sources of funds. Not being able to maintain or replace those deposits as they mature would adversely affect our liquidity. Additionally, if Merchants Bank does not maintain its well-capitalized position, it may not accept or renew any brokered deposits without a waiver granted by the 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.

The following tables show the average balance amounts and the average contractual rates paid on our deposits for the periods indicated:

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The following table shows time deposits of $250,000 or more by time remaining until maturity:

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Borrowings. Borrowings totaled $930.4 million at December 31, 2022, a decrease of $103.6 million, or 10%, from December 31, 2021. Depending on rates and timing, borrowing can be a more effective liquidity management alternative than utilizing brokered certificates of deposits. The Company utilizes borrowing facilities from the FHLB, the Federal Reserve’s discount window, and the American Financial Exchange (“AFX”).

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The Company continues to have significant borrowing capacity based on available collateral. As of December 31, 2022, unused lines of credit totaled $3.1 billion, compared to $2.4 billion at December 31, 2021.

The following table sets forth certain information regarding our borrowings at the dates and for the periods indicated:

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Total Shareholders’ Equity. Shareholders’ equity was $1.5 billion as of December 31, 2022, compared to $1.2 billion as of December 31, 2021. The $304.3 million, or 26%, increase resulted primarily from the 8.25% Series D preferred stock offerings that raised $137.5 million in new capital, net of $5.0 million in offering costs, as well as net income of $219.7 million, which was partially offset by dividends paid on common and preferred shares of $38.1 million during the period, as well as $3.6 million adjustment to retained earnings associated with the adoption of CECL. The CECL adjustment related primarily to OBCEs. Additionally, common stock repurchase activity reduced shareholders’ equity in total by $3.9 million.

Liquidity and Capital Resources

Liquidity

Our primary sources of funds are business and consumer deposits, escrow and custodial deposits, brokered deposits, borrowings, principal and interest payments on loans, and proceeds from sale of loans. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. 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 levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $975.8 million and $(49.2) million for the years ended December 31, 2022 and 2021, respectively. Net cash provided by (used in) investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $(2.9) billion and $(474.3) million for the years ended December 31, 2022 and 2021, respectively. Net cash provided by financing activities, which is comprised primarily of net change in deposits and proceeds from the issuances of preferred stock, was $1.1 billion and $1.4 billion for the years ended December 31, 2022 and 2021, respectively.

The company continues to have a significant borrowing capacity. At December 31, 2022, based on available collateral, we had $3.1 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. This compared to $2.4 billion at December 31, 2021. This liquidity enhances the ability to effectively manage interest expense and asset levels in the future. While the amounts available fluctuate daily, we also had an additional $500.0 million of borrowing capacity through our membership in the AFX as of December 31, 2022.

Certificates of deposit that are scheduled to mature in less than one year from December 31, 2022 totaled $3.0 billion. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may decide to utilize FHLB advances, the Federal Reserve discount window, brokered deposits, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Off-Balance Sheet Arrangements

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

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. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Additionally,

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the Company’s business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.

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.

Capital Resources

The access to and cost of funding new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position. The Company filed a shelf registration statement on Form S-3 with the SEC on August 8, 2022, which was declared effective on August 17, 2022, under which we can issue up to $500 million aggregate offering amount of registered securities to finance our growth objectives.

The assessment of capital adequacy depends on a number of factors, including asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to our current operations and to promote public confidence in our Company.

Shareholders’ Equity. Shareholders’ equity was $1.5 billion as of December 31, 2022, compared to $1.2 billion as of December 31, 2021. The $304.3 million, or 26%, increase resulted primarily from the 8.25% Series D preferred stock offerings that raised $137.5 million in new capital, net of $5.0 million in offering costs, as well as net income of $219.7 million, which was partially offset by dividends paid on common and preferred shares of $38.1 million during the period, as well as $3.6 million adjustment to retained earnings associated with the adoption of CECL. The CECL adjustment related primarily to OBCEs. Additionally, common stock repurchase activity reduced shareholders’ equity in total by $3.9 million.

7% Series A Preferred Stock. In March 2019 the Company issued 2,000,000 shares of 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $25.00 per share (“Series A Preferred Stock”). The Company received net proceeds of $48.3 million after underwriting discounts, commissions and direct offering expenses. In April 2019, the Company issued an additional 81,800 shares of Series A Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement, resulting in an addition $2.0 million in net proceeds, after underwriting discounts.

In June 2019 the Company issued an additional 874,000 shares of Series A Preferred Stock for net proceeds of $21.85 million.

In September 2019 the Company repurchased and subsequently retired 874,000 shares of Series A Preferred Stock at an aggregate cost of $21.85 million. There were no brokerage fees in connection with the transaction.

Dividends on the Series A Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $1.75 per share through March 31, 2024. After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 460.5 basis points per year. In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on March 22, 2019. The terms of the Series A Preferred Stock permit us to replace LIBOR with a substitute index once LIBOR is no longer considered an acceptable market index. However, because the Series A Preferred Stock is still in its fixed rate period, we have not transitioned to a substitute index and likely will not do so until closer to the end of the fixed rate period, allowing additional time for us to determine whether the Federal Reserve’s Secured Overnight Financing Rate (“SOFR”) or another index has become an acceptable market index and is appropriate.

6% Series B Preferred Stock. In August 2019 the Company issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share)(“Series B Preferred Stock”). After deducting underwriting discounts, commissions, and direct offering expenses, the Company received total net proceeds of $120.8 million.

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Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $60.00 per share (equivalent to $1.50 per depositary share) through September 30, 2024. After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 456.9 basis points per year. In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero. The Company may redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after October 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on August 13, 2019. The terms of the Series B Preferred Stock permit us to replace LIBOR with a substitute index once LIBOR is no longer considered an acceptable market index. However, because the Series B Preferred Stock is still in its fixed rate period, we have not transitioned to a substitute index and likely will not do so until closer to the end of the fixed rate period, allowing additional time for us to determine whether SOFR or another index has become an acceptable market index and is appropriate.

8% Preferred Stock. The Company previously issued a total of 41,625 shares of 8% Non-Cumulative, Perpetual Preferred Stock, without par value, with a liquidation preference of $1,000.00 per share (“8% Preferred Stock”) in private placement offerings.

Dividends on the 8% Preferred Stock, to the extent declared by the Company’s board, were payable quarterly at an annual rate of $80.00 per share. As of December 31, 2020, the 8% Preferred Stock became redeemable by the Company at any time, subject to regulatory approval and upon at least 30 days’ prior notice to the holders thereof.

On April 15, 2021, all 41,625 shares of the Company’s 8% preferred stock were redeemed for $41.6 million, plus unpaid dividends of $139,000.

6% Series C Preferred Stock. On March 23, 2021, the Company issued 6,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed Rate Series C Non-Cumulative Perpetual Preferred Stock, without par value (the “Series C Preferred Stock”), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $150.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $5.1 million paid to third parties, the Company received total net proceeds of $144.9 million.

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

Dividends on the Series C Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series C Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after April 1, 2026, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.

8.25% Series D Preferred Stock. On September 27, 2022, the Company issued 5,200,000 depositary shares, each representing a 1/40th interest in a share of its 8.25% Fixed Rate Series D Non-Cumulative Perpetual Preferred Stock, without par value (the “Series D Preferred Stock”), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $130.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.6 million paid to third parties, the Company received total net proceeds of $125.4 million. On September 30, 2022, the Company issued an additional 500,000 shares of Series D Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement, resulting in an additional $12.1 million in net proceeds, after deducting $0.4 million in underwriting discounts.

Dividends on the Series D Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series D Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after October 1, 2027, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.

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Common Shares/Dividends. As of December 31, 2022, the Company had 43,113,127 common shares issued and outstanding. The Board declared a quarterly dividend of $0.07 per share in each quarter of 2022. 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. 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 following table summarizes our share repurchase authorizations and repurchase activity of our common stock through December 31, 2022:

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The timing and actual number of additional shares repurchased will depend on a variety of factors, including cash requirements to meet the operating needs of the business, legal requirements, as well as the share price and economic and market conditions.

Capital Adequacy. The following tables present the Company’s capital ratios at December 31, 2022 and 2021.

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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. 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.

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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. Accordingly, the Company has been reporting fully phased-in Basel III risk-based capital ratios since September 30, 2022.

Quantitative measures established by regulation to ensure capital adequacy require the Company, Merchants Bank, and FMBI to maintain minimum amounts and ratios. Management believes, as of December 31, 2022 and December 31, 2021, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject.

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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. 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. The payment amounts represent those amounts contractually due to the recipients.

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Also see Note 10: Leases, Note 13: Deposits, Note 14: Borrowings, and Note 25: Commitments, Credit Risk, and Contingencies of our consolidated financial statements as of December 31, 2022.

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Critical Accounting Policies and Estimates

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. 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 estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The following represent our critical accounting policies:

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

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

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

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The ACL-Loans consists of individually evaluated loans and pooled loan components. The Company’s primary portfolio segmentation is by credit risk grade. Loans risk graded substandard and worse are individually evaluated for expected credit losses. For individually evaluated loans that are collateral dependent, an allowance is established when the fair value of the collateral, the loan’s obtainable market price, or the present value of expected future cash flows discounted at the loan’s effective interest rate, is lower than the carrying value of that loan. 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. 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. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.

Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. 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

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earnings rate, an inflation rate, ancillary income, prepayment speeds, prepayment penalties, and default rates and losses. We review the reasonableness of the assumptions and the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States. These variables change from quarter to quarter as market conditions and projected interest rates change and may have an adverse impact on the value of the mortgage-servicing right and may result in a reduction to noninterest income.

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by us can be found in Note 23 of our Consolidated Financial Statements “Disclosures About Fair Value of Assets and Liabilities.”

Recently Issued Accounting Pronouncements

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of December 31, 2022, see Note 28 of our Consolidated Financial Statements “Recent Accounting Pronouncements.”