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Information included in or incorporated by reference in this Annual Report on Form 10-K, our other filings with the Securities and Exchange Commission and our press releases or other public statements, contain or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to a discussion of our forward-looking statements and associated risks in Item 1, “Business – Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” and our discussion of risk factors in Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
PART I
Item 1. Business.
Company Overview
Merchants Bancorp (the “Company,” “Merchants,” “we,” “our,” or “us”), an Indiana corporation formed in 2006, is a diversified bank holding company headquartered in Carmel, Indiana and registered under the Bank Holding Company Act of 1956, as amended. We currently operate multiple lines of business with a focus on Federal Housing Administration (“FHA”) multi‑family housing and healthcare facility financing and servicing, mortgage warehouse financing, retail and correspondent residential mortgage banking, agricultural lending and traditional community banking. As of December 31, 2017, we had $3.4 billion in assets, $2.9 billion of deposits and $367.5 million of shareholders’ equity.
We were founded in 1990 as a mortgage banking company, providing financing for multi‑family housing and senior living properties. The shared vision of our founders, Michael Petrie and Randall Rogers, was to create a diversified financial services company, which efficiently operates both nationally through mortgage banking and related services and locally through a community bank. We have grown both organically and through acquisitions focused on expanding our services. We have strategically built our business in a way that we believe offers insulation from cyclical economic and credit swings and may provide synergies across our lines of business.
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 retail and correspondent residential mortgage banking and agricultural lending. Merchants Bank has four depository branches located in Carmel, Indianapolis, and Lynn, Indiana. Joy State Bank, our other wholly-owned banking subsidiary, which we acquired on January 2, 2018, operates under an Illinois charter and provides traditional community banking services and agricultural lending. Joy State Bank has two depository branches, with one located in Joy, Illinois and the other located in New Boston, Illinois.
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
P/R Mortgage and Investment Corp. (“P/RMIC”) and RICHMAC Funding, LLC (“RICHMAC”), subsidiaries of Merchants Bank, are primarily engaged in mortgage banking, specializing in originating and servicing loans for multi‑family rental housing and healthcare facility financing, particularly for senior living properties. In August 2017, P/RMIC acquired RICHMAC, a national multi‑family housing mortgage lender, to compliment and expand the products and services offered by P/RMIC. Through the RICHMAC acquisition, P/R Mortgage gained the ability to originate and service Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) Affordable multi-family products.
Through the Multi-Family Mortgage Banking segment, we primarily originate FHA loans that are sold as Government National Mortgage Association (“Ginnie Mae”), Freddie Mac Affordable, and Fannie Mae Affordable mortgage backed securities within approximately 30 days. The loans are sold and servicing is retained. Other originations include bridge and permanent financing that are referred to the Banking segment. These loans eventually
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become permanent FHA financings through this segment. In addition to the loans originated directly through Multi-Family Mortgage Banking, we also fund loans brought to us by non‑affiliated entities.
The segment’s primary source of funding is the national secondary mortgage market. Investors in the market are large financial institutions, brokerage companies, insurance companies and real estate investment trusts. P/RMIC is an approved FHA lender and a Ginnie Mae issuer of mortgage backed securities. It is also an approved Multi-family Accelerated Processing and Housing and Urban Development (“HUD”) section 232 LEAN lender and a Rural Housing Service (“RHS”) approved lender for their Section 538 program. RICHMAC is an approved Freddie Mac and Fannie Mae Affordable lender. These programs facilitate secondary market activities in order to provide funding for the multi‑family mortgage market.
Multi-Family Mortgage Banking also funds loans through the sale of participation interests to Merchants Bank, where they accrue interest for approximately 30 days before delivery to the end investor. Generally, these loans have 35 year fixed rates with 10 year call protection. The loans are predominantly insured by the FHA and RHS and rate locked as forward delivery Ginnie Mae, Fannie Mae and Freddie Mac securities, who guarantees the timely payment of principal and interest to investors. It also services or sub-services the loans for a fee.
Mortgage Warehousing
Merchants Bank started our warehouse lending business in 2009 as a result of dislocation in the market. Merchants Bank currently has warehouse lines of credit and loan participations with some of the largest non‑depository financial institutions and mortgage bankers in the country.
Under its warehouse program, Merchants Bank provides warehouse financing arrangements to lenders for the origination and sale of residential mortgage loans. Merchants Bank structures its funding primarily as a loan participation and also offers secured lines of credit. Agency eligible (Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), governmental (FHA insured or Veterans Affairs (“VA”) or United States Department of Agriculture (“USDA”) guaranteed), and jumbo residential mortgage loans that are secured by mortgages placed on single and multi-family properties may be purchased and placed on each mortgage warehouse line.
Through Natty Mac Funding, Inc. (“NMF”), a wholly-owned subsidiary of Merchants Bank, we engage in loan participations and warehouse financing with Home Point Financial Corporation ("Home Point") and its subsidiaries and correspondent customers. We entered into a Revolving Loan and Subordinated Loan Agreement whereby Home Point invested $30 million in our subordinated debt. In turn, we invested the proceeds into Merchants Bank and then to NMF. NMF provides $300 million of lending capacity to Home Point and its subsidiaries and correspondent customers. We earn net interest income and use Home Point custodial deposits to fund the loans. This funding model is scalable to other mortgage warehouse clients.
Banking
Commercial Lending and Retail Banking
Merchants Bank holds loans in its portfolio comprised of multi‑family construction and bridge loans referred by P/RMIC and RICHMAC, owner occupied commercial real estate loans, commercial & industrial loans, agricultural loans, residential mortgage loans and consumer loans. 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 P/RMIC. Joy State Bank receives deposits from customers located primarily in Mercer County, Illinois.
Agricultural Lending
Merchants Bank’s Lynn office, located in Lynn, Randolph County, Indiana, primarily provides agricultural loans within its designated CRA area of Randolph and Wayne counties in Eastern Indiana and nearby Darke County, Ohio. Joy State Bank primarily provides agricultural loans within its designated CRA area of Mercer County in Western Illinois. Merchants Bank and Joy State Bank 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