Merchants Bancorp (MBIN) FY 2021 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, 2020 compared to the year ended December 31, 2019 is contained in Item 7 of Form 10-K for the year ended December 31, 2020 filed with the SEC on March 5, 2021.

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, 2021

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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 and service multiple lines of business, including multi-family housing, mortgage warehouse financing, retail and correspondent residential mortgage banking, agricultural lending, Small Business Administration (“SBA”) lending, and traditional community banking. The Company is also a syndicator of low-income housing tax credit and debt funds.

Our business consists primarily of funding low risk loans that sell within 90 days of origination. 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. 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 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, 2021 and 2020” 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.

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 any servicing fees paid or costs 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.

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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) low-income housing tax credit syndication fees; (f) asset management fees; and (g) other noninterest income.

Gain on sale of loans includes placement and origination fees, capitalized servicing rights, trading gains and losses, 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. Low-income housing tax credit fee income is recognized at the point in time when investor equity capital is obtained to acquire qualifying investments in low-income housing tax credit projects for its 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. In response to the COVID-19 pandemic, we migrated employees to work-from-home arrangements in mid-March 2020 and continued operating without disruption to our customers. Most employees returned to the office part-time by December 2020 and full-time by August 2021. We have also assessed our internal control environment and believe we have the necessary precautions in place to ensure business continuity.

Loan expenses include third party processing for mortgage warehouse 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.

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 securities we hold; (j) the repricing characteristics of our assets; (k) maturity and duration of our assets when compared to the repricing characteristics of our liabilities and other factors; and (l) costs of available funding options.

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

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factors. In addition, since 2014 we have annually 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 loan losses; (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 economic conditions, market interest rates, and the credit parameters set by the GSEs. Since July 2019, the Federal Reserve has continued to reduce interest rates. During 2020, the Federal Reserve reduced the Federal Funds rates by 150 basis points, leading to historically low rates in the range of 0.0% to 0.25%, which was the lowest the rates have been since 2008.

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. This growth started to level off during the year ended December 31, 2021, and we do not anticipate that the 2020 trend of growth will necessarily continue. Supporting this expectation are reports from the Mortgage Bankers Association, which has forecasted a 3% decrease in single-family residential mortgage volume, to $3.991 trillion for 2021, from $4.108 trillion in 2020, and a decrease of 35%, to $2.600 trillion in 2022, followed by a decrease to $2.526 trillion for 2023.

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 are still likely suffering losses or closures. Personal illnesses and business closures have impacted nearly every industry, including the mortgage banking industry. However, we believe Merchants has minimal direct credit exposure on loans to consumer, commercial, and other small businesses that have been most negatively impacted by COVID-19. As of December 31, 2021 we had only 1 loan in payment deferral arrangements, with an unpaid balance of $36.8 million that represented 0.40% of total loans and loans held for sale. We continue to monitor the situation and may need to adjust future expectations as developments occur.

Regulatory Environment. We believe the most important trends 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 elects to use such measure, such institution or holding company will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios. In April 2020, under the CARES Act, the 9% leverage ratio threshold was temporarily reduced to 8% in response to the COVID-19 pandemic. The threshold increased to 8.5% in 2021 and will return to 9% in 2022. On December 2, 2020 the FDIC issued an interim final rule related to COVID-19 as it pertains to eligibility to utilize CBLR. The rule allows organizations with less than $10 billion in total

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assets as of December 31, 2019, to use the assets on that date to determine the applicability of various regulatory asset thresholds during 2020 and 2021. The Company, Merchants Bank, and FMBI elected to begin using CBLR for the first quarter of 2020 and all intend to utilize this measure until we no longer qualify.

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.

Allowance for Loan Losses. One of our key operating objectives has been, and continues to be, maintenance of an appropriate level of allowance for loan losses for probable incurred losses in our loan portfolio. The provision for loan 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 could moderate in 2022, we could similarly expect the provision to decrease, but could also be influenced by any changes to problem loans in our portfolio, the loan type mix within the portfolio or the adoption of ASU 2016-13 for Current Expected Credit Losses (“CECL”). See Note 28 of the Notes to our Consolidated Financial Statements for additional details on CECL. Additional details are provided in the Allowance for Loan Losses portion of the Comparison of Financial Condition at December 31, 2021 and December 31, 2020. Because there could be unforeseen future losses associated with the impact of COVID-19, the Company continues to monitor the situation and may need to adjust future expectations as developments occur.

Issuance and Redemption of 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-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.

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.

Comparison of Operating Results for the Years Ended December 31, 2021 and 2020

General. Net income for the year ended December 31, 2021 was $227.1 million, an increase of $46.6 million, or 26%, over the net income of $180.5 million for the year ended December 31, 2020. The increase was primarily due to a $53.8 million, or 24%, increase in net interest income that reflected a 46% decrease in cost of deposits and a 10% increase in interest income from higher loan balances, as well as a $18.2 million increase in loan servicing fees primarily related to positive fair market value adjustments to servicing rights. Also contributing to the increase in net income was a $14.6 million, or 15% increase in gain on sale of loans.

Partially offsetting the increases to net income was a $26.5 million, or 45%, increase in salaries and employee benefits, including commissions, to support higher loan production volumes, as well as an increase of $15.0 million, or 24%, to the provision for income taxes on 25% higher pre-tax net income.

Net Interest Income. Net interest income increased $53.8 million, or 24%, to $278.0 million for the year ended December 31, 2021, compared to $224.1 million for the year ended December 31, 2020. The increase was primarily due to a $1.6 billion increase in our average interest earning assets and a 15 basis point increase in our interest rate spread, to 2.73%, for the year ended December 31, 2021 from 2.58% for the year ended December 31, 2020.

Our net interest margin increased 10 basis points, to 2.79%, for the year ended December 31, 2021 from 2.69% for the year ended December 31, 2020. The increase in net interest margin reflected higher average loan balances and

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lower funding costs that outpaced the lower overall market interest rates on loans compared to the year ended December 31, 2020.

Interest Income. Interest income increased $29.1 million, or 10%, to $311.9 million for the year ended December 31, 2021, from $282.8 million for the year ended December 31, 2020. This increase was primarily attributable to a $29.9 million increase in interest on loans and a $1.6 million increase in interest on mortgage loans in process of securitization, which was partially offset by a $2.5 million decrease of other interest-bearing assets.

Interest income for loans and loans held for sale increased $29.9 million compared to the year ended December 31, 2020. The average balance of loans, including loans held for sale, during the year ended December 31, 2021 increased $1.5 billion, or 21%, to $8.5 billion from $7.0 billion for the year ended December 31, 2020, reflecting significant increases in loan volume. The average yield on loans decreased 32 basis points, to 3.45%, for the year ended December 31, 2021, compared to 3.77% for the year ended December 31, 2020, due to lower overall interest rates in the economy period to period.

Interest income for mortgage loans in process of securitization increased by $1.6 million compared to the year ended December 31, 2020. The average balance of mortgage loans in process of securitization increased $112.9 million, or 30%, to $494.3 million for the year ended December 31, 2021 from $381.3 million for the year ended December 31, 2020, and the average yield decreased 34 basis points, to 2.58%, for the year ended December 31, 2021, compared to 2.92% for the year ended December 31, 2020.

Interest income for interest-bearing deposits and other assets decreased by $2.5 million compared to the year ended December 31, 2020. The average balance of interest-earning deposits and other assets increased $4.1 million, or 1%, to $669.4 million for the year ended December 31, 2021 from $665.3 million for the year ended December 31, 2020, and the average yield decreased 38 basis points, to 0.29%, for the year ended December 31, 2021, compared to 0.67% for the year ended December 31, 2020.

Interest Expense. Total interest expense decreased $24.8 million, or 42%, to $33.9 million for the year ended December 31, 2021, compared to $58.6 million for the year ended December 31, 2020.

Interest expense on total deposits decreased $24.0 million, or 46%, to $28.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was attributable to lower volume and rates of certificates of deposits and lower rates of interest-bearing checking.

Interest expenses for certificates of deposit decreased $19.0 million compared to the year ended December 31, 2020. The average balance of certificates of deposits of $687.0 million for the year ended December 31, 2021 decreased $1.0 billion, or 60%, compared to the year ended December 31, 2020. The average yield of certificates of deposits was 0.66% for the year ended December 31, 2021, which was a 70 basis point decrease compared to 1.36% for the year ended December 31, 2020.

Interest expense for interest-bearing checking deposits decreased $5.6 million compared to the year ended December 31, 2020. The decrease was attributable to 23 basis point decrease in the average cost of interest-bearing checking deposits, to 0.14% for the year ended December 31, 2021 from 0.37% for the same period in 2020. Offsetting the lower average cost was a $1.4 billion, or 42%, increase in the average balance of interest-bearing checking deposits, which reached $4.6 billion for the year ended December 31, 2021.

Interest expense on borrowings decreased $770,000, or 12%, to $5.6 million for the year ended December 31, 2021 from $6.4 million for the year ended December 31, 2020. The decrease was due primarily to a 12 basis point decrease in the average cost of borrowings to 0.86%, compared to 0.98% for the year ended December 31, 2020. The average balances for the year ended December 31, 2021 reflected an increase in average borrowing from the FHLB and the American Financial Exchange (“AFX”) at much lower rates. Also included in borrowings, our warehouse structured financing agreement 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 0.40% and 0.46%, to an effective rate of 0.86% and 0.98% for the year ended December 31, 2021 and 2020, 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 in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.

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

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Provision for Loan Losses. We recorded a provision for loan losses of $5.0 million for the year ended December 31, 2021, a decrease of $6.8 million, compared with the year ended December 31, 2020. The allowance for loan losses was $31.3 million, or 0.54% of loans receivable at December 31, 2021, compared to $27.5 million, or 0.50% of loans receivable at December 31, 2020. The increase in the allowance for loan losses compared to prior periods reflected increases associated with loan growth and uncertainties surrounding COVID-19. Additional details are provided in the Allowance for Loan Losses portion of the Comparison of Financial Condition at December 31, 2021 and December 31, 2020. The Company continues to monitor the situation and may need to adjust future expectations as developments occur.

Noninterest Income. Noninterest income increased $29.9 million, or 23%, to $157.3 million for the year ended December 31, 2021 from $127.5 million for the year ended December 31, 2020. The increase was primarily due to a $18.2 million increase in loan servicing fees that reached $16.4 million for the year ended December 31, 2021 and included a $12.4 million positive adjustment to the fair value of servicing rights, compared to a negative adjustment of $5.8 million for the year ended December 31, 2020.

Also contributing to the increase in noninterest income was a $14.6 million, or 15%, increase in gain on sale of loans, to $111.2 million, for the year ended December 31, 2021 compared to $96.6 million for the year ended December 31, 2020, primarily from an increase in the volume of multi-family loans. Offsetting the increase in volume of multi-family was a decrease in volume and gain on sale of single-family loans.

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A summary of the gain on sale of loans for the years ended December 31, 2021 and 2020 is below:

Partially offsetting the increase on loan servicing fees and gain on sale of loans was a $8.6 million decrease in mortgage warehouse fees. The decrease was primarily due to the decrease in mortgage warehouse volumes during 2021.

Noninterest Expense. Noninterest expense increased $29.0 million, or 30%, to $125.4 million for the year ended December 31, 2021, compared to $96.4 million for the year ended December 31, 2020. The increase was due primarily to a $26.5 million, or 45%, increase in salaries and employee benefits, including commissions, to support higher loan production volumes and gain on sale. The efficiency ratio was 28.8% for the year ended December 31, 2021, compared with 27.4% for the year ended December 31, 2020.

Income Taxes. Income tax expense increased $15.0 million, or 24%, to $77.8 million for the year ended December 31, 2021, from $62.8 million for the year ended December 31, 2020. The increase was due primarily to a 25% increase in pre-tax income. Our effective tax rate was 25.5% for the year ended December 31, 2021 and 25.8% for the year ended December 31, 2020.

Asset Quality

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The Company believes it has minimal direct credit exposure on loans to consumer, commercial and other small businesses that may be negatively impacted by COVID-19. As of December 31, 2021, we had only 1 loan remaining in a payment deferral arrangement, with an unpaid balance of $36.8 million that represented 0.40% of total loans and loans held for sale. This increase compared to $0.9 million at December 31, 2020 was due to one multi-family loan for which full repayment is expected and is fully collateralized. Management has also assisted small businesses that could benefit from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, particularly in the SBA’s Paycheck Protection Program (“PPP”). As of December 31, 2021, we had principal balances of $7.0 million in loans to small businesses under this program, compared to $60.2 million at December 31, 2020. The decrease reflected higher loan pay-offs as the program is likely near its conclusion.

Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $0.8 million, or 0.01% of total loans, at December 31, 2021, compared to $6.3 million, or 0.11% of total loans, at December 31, 2020.

As a percentage of nonperforming loans, the allowance for loan losses was 4,118.8% at December 31, 2021 compared to 435.1% at December 31, 2020. The changes were primarily due to decreases in nonperforming loans.

Total loans greater than 30 days past due were $2.7 million at December 31, 2021 compared to $47.8 million at December 31, 2020. The amount at December 31, 2021 excludes government guarantee commercial SBA loans totaling $3.5 million.

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Traditional Special Mention (Watch) loans were $100.8 million at December 31, 2021, compared to $152.9 million at December 31, 2020. The decrease primarily reflected the transition of one multi-family loan in the Special Mention (Watch) category to the Substandard category. The transitioned loan is fully collateralized and is expected to be repaid. The decrease also reflected a large borrowing relationship that was removed from this category after its financial performance improved. Classified (substandard, doubtful and loss) loans were $43.4 million at December 31, 2021 and $14.5 million at December 31, 2020. The increase primarily reflected the transition of a loan previously included on the Special Mention (Watch) category, to the Substandard category, for which full repayment is expected.

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We had $24,000 of recoveries and $1.2 million of charge offs during the year ended December 31, 2021, and $181,000 of recoveries and $361,000 of charge offs during the year ended December 31, 2020.

Operating Segment Analysis for the Years Ended December 31, 2021 and 2020

Our reportable segments are Multi-family Mortgage Banking, 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 accounting 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 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 loan losses is allocated based on information included in our allowance for loan losses 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, 2021 and 2020.

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Multi-family Mortgage Banking. The Multi-family Mortgage Banking segment reported net income of $51.5 million for the year ended December 31, 2021, an increase of $22.3 million, or 76%, compared with $29.2 million reported for the year ended December 31, 2020. The growth was primarily due to a $60.9 million increase in noninterest income from a $46.0 million increase in gain on sale of loans, and a $10.3 million increase in loan servicing fees.

The year ended December 31, 2021 included a $4.1 million positive fair value adjustment to servicing rights in loan servicing fees, compared with a $5.4 million negative adjustment for the year ended December 31, 2020.

Partially offsetting the increase in noninterest income was a $30.1 million increase in noninterest expenses, primarily due to an increase in salaries and employee benefits, including commissions, to support higher loan production volumes, in addition to a $8.3 million increase in the provision for income taxes associated with a 76% higher pre-tax income compare to the year ended December 31, 2020.

The volume of loans originated and acquired for sale in the secondary market increased by $967.2 million, or 49%, to $2.9 billion for the year ended December 31, 2021, compared to $2.0 billion for the year ended December 31, 2020.

Total assets in the Multi-family segment increased 41%, to $296.1 million at December 31, 2021, compared to $210.7 million at December 31, 2020. These assets do not include multi-family and healthcare loans of $3.5 billion at December 31, 2021 and $2.7 billion at December 31, 2020 that are reported in our Banking segment.

Mortgage Warehousing. The Mortgage Warehousing segment reported net income of $95.2 million for the year ended December 31, 2021, a decrease of 11% over the $106.3 million reported for the year ended December 31, 2020. The decrease was primarily due to lower loan volume and warehouse fees as industry volumes declined. The volume of loans funded during the year ended December 31, 2021 amounted to $78.3 billion, a decrease of $32.5 billion, or 29%, compared to the same period in 2020. This compared to the 3% industry decrease in single-family residential loan volumes from the year ended December 31, 2021 to the year ended December 31, 2020, according to the Mortgage Bankers Association.

Total assets in the Mortgage Warehousing segment decreased 19%, to $4.0 billion at December 31, 2021, compared to $4.9 billion at December 31, 2020.

Banking. The Banking segment reported net income for the year ended December 31, 2021, of $90.9 million, an increase of 69% over the $53.6 million reported for the year ended December 31, 2020. The increase was primarily due to a $68.4 million increase in net interest income after provision for loan losses, associated with higher loan volume and a $9.7 million increase in loan servicing fees. Partially offsetting these increases was a $31.4 million decrease in gain on sale of loans and a $11.9 million increase in the provision for income taxes associated with a 68% higher pre-tax income.

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The year ended December 31, 2021 included a positive fair market value adjustment of $8.3 million on single-family and SBA servicing rights, compared to a negative fair market value adjustment of $0.5 million for the year ended December 31, 2020.

Total assets in the Banking segment increased $2.4 billion, or 54%, to $6.9 billion at December 31, 2021, compared to $4.5 billion at December 31, 2020.

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, 2021, we had approximately $11.3 billion in total assets, $9.0 billion in deposits, and $1.2 billion in total shareholders’ equity. Total assets as of December 31, 2021 included approximately $1.0 billion of cash and cash equivalents, $9.1 billion of loans, which was comprised of $3.3 billion of loans held for sale and $5.8 billion of loans held for investment, net of allowance for loan losses. Total assets also include $569.2 million of mortgage loans in process of securitization that primarily 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 $310.6 million of available for sale securities that are match funded with related custodial deposits. There are restrictions on the types of securities, as these are funded by certain custodial deposits where we set the cost of deposits based on the yield of the related securities. Servicing rights at December 31, 2021 were $110.3 million based on the fair value of the loan servicing, which are primarily GNMA multi-family servicing rights with 10-year call protection.

Comparison of Financial Condition at December 31, 2021 and 2020

Total Assets. Total assets increased 17%, or $11.3 billion at December 31, 2021, from $9.6 billion at December 31, 2020. The increase was due primarily to increases in cash and cash equivalents of $852.9 million, loans receivable, net of allowance for loan losses of $243.4 million, loans held for sale of $233.0 million and mortgage loans in process of securitization of $230.5 million.

We intend to meet eligibility as a well-capitalized institution as defined by CBLR or risk-based capital rules. We may take advantage of market conditions that could present opportunities for continued asset growth, even if such opportunities result in us no longer meeting the CBLR eligibility requirements, such as exceeding $10 billion in assets. While our assets at December 31, 2021 exceeded the $10 billion traditional maximum to utilize CBLR, the FDIC issued an interim final rule related to COVID-19 that allows organizations with less than $10 billion in total assets as of December 31, 2019, to use the assets on that date to determine the applicability of various regulatory asset thresholds during 2021. Should our assets remain above $10 billion, because of the applicable grace period, the earliest we would have to comply with the risk-based capital rules would be September 30, 2022.

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Cash and Cash Equivalents. Cash and cash equivalents increased $852.9 million, or 475%, to $1.0 billion at December 31, 2021, from $179.7 million at December 31, 2020. The 475% increase reflected higher liquidity to fund anticipated loan growth.

Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization increased $230.5 million, or 68%, to $569.2 million at December 31, 2021, from $338.7 million at December 31, 2020. 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 68% increase was primarily due to an increase in the volume of loans that had not yet settled with government agencies.

Available for Sale Securities. Available for sale securities increased $40.8 million, or 15%, to $310.6 million at December 31, 2021, from $269.8 million at December 31, 2020. The increase in securities available for sale was primarily due to purchases of $221.2 million, offset by calls, maturities, sales, and repayments of securities totaling $176.6 million during the period. The purchases include the $28.7 million in securities purchased from Freddie Mac following the loan sale and securitization arrangement with Freddie Mac described in Note 5: Loans and Allowance for Loan Losses.

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We invest in available for sale securities primarily using funds from escrow deposits held at Merchants Bank, received in connection with our multi-family mortgage servicing activities. The available for sale securities are funded by 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.

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

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FHLB stock. FHLB stock decreased $41.1 million, or 58%, to $29.6 million at December 31, 2021, from $70.7 million at December 31, 2020. The decrease in FHLB stock was due primarily to reduced borrowing from the FHLB. Stock ownership generally correlates to levels of borrowing.

Loans Held for Sale. Loans held for sale, comprised primarily of single-family residential real estate loan participations that meet Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), or Ginnie Mae (“GNMA”) eligibility, increased $233.0 million, or 8%, to $3.3 billion at December 31, 2021, from $3.1 billion at December 31, 2020. The increase in loans held for sale was primarily due to higher multi-family volumes for the year ended December 31, 2021, including those designated for future sales into debt funds and Freddie Mac Q Series securitizations.

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 $243.4 million, or 4%, to $5.8 billion at December 31, 2021, compared to $5.5 billion at December 31, 2020. The increase in net loans was comprised primarily of:

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The $779.2 million increase in multi-family and healthcare financing was due to higher origination volume for construction, bridge and other loans generated through our multi-family segment that will remain on our balance sheet until they convert to permanent financing or are otherwise paid off over an average of one to three years. Partially offsetting the higher origination volume was the $262.0 million loan sale and securitization arrangement with Freddie Mac described in Note 5: Loans and Allowance for Loan Losses.

The $164.3 million increase in residential real estate loans was primarily due to growth in first-lien HELOC loans.

The $132.9 million increase in commercial and commercial real estate was also due to higher origination volume during the year ended December 31, 2021.

The $824.3 million decrease in mortgage warehouse lines of credit was primarily due to lower loan volume as higher rates have decreased demand in refinancing activity. This was partially offset by increases in loans held for sale and mortgage loans in process of securitization in our mortgage warehouse business.

As of December 31, 2021, approximately 95% of the total net loans at Merchants Bank reprice within three months.

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Allowance for Loan Losses. The following table presents an analysis of the allowance for loan losses for the periods presented:

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The following table presents an analysis of the allowance for loan losses 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 allowance for loan losses of $31.3 million at December 31, 2021 increased $3.8 million compared to December 31, 2020, primarily reflecting increases associated with loan growth in the multi-family portfolio. The portion of the allowance associated with the COVID-19 pandemic has remained relatively steady since December 31, 2020, at approximately $0.8 million. Partially offsetting the loan growth was a release of $1.4 million from the allowance associated with the $262.0 million loan sale and ultimate securitization of Freddie Mac. As described in Note 5: Loans and Allowances for Loan Losses, this $1.4 million release was offset by the establishment of a $1.4 reserve in Other Liabilities related to the first loss obligation of securities purchased after securitization.

We have minimal direct exposure to consumer, commercial, and other small businesses that may be negatively impacted by COVID-19, but continue to assist customers facing financial setbacks. As of December 31, 2021, the Company had only 1 loan remaining in a payment deferral arrangement, with an unpaid balance of $36.8 million compared to $0.9 million at December 31, 2020, with the increase reflecting one multi-family loan for which full repayment is expected and is fully collateralized.

Also influencing the overall level of the allowance for loan losses is our differentiated strategy to typically hold loans with shorter durations and to maintain strict underwriting standards that enable us to sell the majority of our loans to government agencies.

Premises and Equipment, Net.  Premises and equipment, net, increased 5%, to $31.2 million at December 31, 2021, compared to December 31, 2020. The increase was primarily due to an increase in furniture, fixtures and equipment.

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Goodwill.   Goodwill of $15.8 million at December 31, 2021 remained unchanged compared to December 31, 2020. As of December 31, 2021, the Company’s market capitalization was above its book value, despite stock market volatility related to the adverse effects of the COVID-19 pandemic on the global economy. 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 $27.7 million, or 34%, to $110.3 million at December 31, 2021, compared to $82.6 million at December 31, 2020. During the year ended December 31, 2021, additions included originated and purchased servicing of $32.5 million and a positive fair value adjustment of $12.4 million. These increases were offset by paydowns of $16.7 million and sold servicing of $0.4 million. The positive fair market value adjustment reflected $6.8 million for single-family servicing rights, $4.1 million for multi-family servicing rights and $1.5 million for SBA servicing rights during the year ended December 31, 2021. 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, 2021 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.

Deposits. Deposits increased $1.6 billion, or 21%, to $9.0 billion at December 31, 2021, from $7.4 billion at December 31, 2020. The increase was primarily due to growth in savings accounts and brokered certificates of deposit. Savings accounts increased $860.8 million, or 43%, to $2.8 billion at December 31, 2021, while certificate of deposits increased by $842.4, or 236%, to $1.2 billion at December 31, 2021.

We increased our use of total brokered deposits by $986.1 million, or 84%, to $2.2 billion at December 31, 2021 from $1.2 billion at December 31, 2020. Brokered deposits represented 24% of total deposits at December 31, 2021, compared to 16% of total deposits at December 31, 2020.

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

Interest-bearing deposits increased $1.8 billion, or 27%, to $8.3 billion at December 31, 2021, and noninterest-bearing deposits decreased $212.2 million, or 25%, to $641.4 million at December 31, 2021.

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 $1.0 billion at December 31, 2021, an decrease of $314.3 million, or 23%, from December 31, 2020. Depending on rates, timing and availability, 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 AFX.

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The Company continues to have significant borrowing capacity based on available collateral. As of December 31, 2021, unused lines of credit totaled $2.4 billion, compared to $2.6 billion at December 31, 2020. The decrease compared to December 31, 2020 reflected a shift from borrowing at the Federal Home Loan Bank of Indianapolis during the year ended December 31, 2021 after a change in their collateral policy to eliminate certain agency eligible mortgage loan participations. While the amounts available fluctuate daily, we also had an additional $350.0 million of borrowing capacity through our membership in the AFX as of December 31, 2021.

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

Total Shareholders’ Equity. Total shareholders’ equity increased $344.8 million, or 43%, to $1.2 billion at December 31, 2021, from $810.6 million at December 31, 2020. The increase resulted primarily from net income of $227.1 million during the year and the 6% Series C preferred stock offerings that raised $191.1 million in new capital, net of $5.1 million in offering costs.

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. Our most liquid assets are cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale,

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and warehouse lines of credit included in loans receivable. 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 (used in) operating activities was $(49.2) million and $(874.9) million for the years ended December 31, 2021 and 2020, respectively. Net cash (used in) investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $(474.3) million and $(2.5) billion for the years ended December 31, 2021 and 2020, respectively. Net cash provided by financing activities, which is comprised primarily of net change in borrowings and deposits, was $1.4 billion and $3.1 billion for the years ended December 31, 2021 and 2020, respectively.

At December 31, 2021, cash balances of $1.0 billion increased by $852.9 million compared to December 31, 2020. The company also continues to have a significant borrowing capacity. At December 31, 2020, based on available collateral, we had access of up to an additional $2.4 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. This compared to $2.6 billion at December 31, 2020. Our borrowing capacity with the Federal Home Loan Bank of Indianapolis was reduced during 2021 after a change in their collateral policy to eliminate certain agency eligible mortgage loan participations. This liquidity enhances the ability to effectively manage interest expense and assets levels in the future. While the amounts available fluctuate daily, we also had an additional $350.0 million of borrowing capacity through our membership in the AFX as of December 31, 2021. This liquidity enhances the ability to effectively manage interest expense and asset levels in the future. The Company began utilizing the PPPLF and the Federal Reserve discount window during 2020, and AFX during the year ended December 31, 2021.

At December 31, 2021, we had $2.4 billion in outstanding commitments to extend credit that are subject to credit risk and $4.2 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.

Within our role as a multi-family mortgage servicer for other banks and investors, we may be obligated to remit principal and interest payments to investors on certain loans regardless of the borrower’s ability to make payments, which could become more likely if the COVID-19 pandemic persists. If there are situations where a borrower is granted a forbearance, the Company believes it has sufficient liquidity to cover these required advances. We have not received any requests for forbearance in our multi-family portfolio that is serviced for others as of December 31, 2021 but remain confident in our ability to fund potential advances we may be required to make as a result of the COVID-19 pandemic.

Certificates of deposit that are scheduled to mature in less than one year from December 31, 2021 totaled $1.1 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.

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 December 30, 2019, which was declared effective on January 9, 2020, under which we can issue up to $300 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 $1.2 billion as of December 31, 2021, compared to $810.6 million as of December 31, 2020. The $344.8 million increase resulted primarily from $227.1 million in net income and the 6% Series C preferred stock offerings that raised $191.1 million in new capital, net of $5.1 million in offering costs.

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

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

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

Dividends on the Series A Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $1.75 per share through March 31, 2024. After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 460.5 basis points per year. In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on March 22, 2019. 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 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.

Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $60.00 per depositary share (equivalent to $1.50 per depositary share) through 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 a private placement offering.

Dividends on the 8% Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $80.00 per share. 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 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

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$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 Stock shareholders participated in a private offering to replace their redeemed 8% Preferred 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.

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.

Common Shares/Dividends. As of December 31, 2021, the Company had 43,180,079 common shares issued and outstanding. The Board declared a quarterly dividend of $0.06 per share in each quarter of 2021.

Capital Adequacy. The following tables present the Company’s capital ratios at December 31, 2021 and 2020.

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On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing CBLR, which became effective on January 1, 2020. The intent of CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions and depository institution holding companies, as directed under the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under CBLR, if a qualifying depository institution or depository institution holding company elects to use such measure, such institution or holding company will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios. Eligibility criteria to utilize CBLR includes the following:

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In April 2020, under the CARES Act, the 9% leverage ratio threshold was temporarily reduced to 8% in response to the COVID-19 pandemic. The threshold increased to 8.5% in 2021 and will return to 9% in 2022. The Company, Merchants Bank, and FMBI elected to begin using CBLR in the first quarter of 2020 and all intend to utilize this measure until we no longer qualify and thus will not calculate or report risk-based capital ratios.

On December 2, 2020 the FDIC issued an interim final rule related to COVID-19 as it pertains to eligibility to utilize CBLR. The rule allows organizations with less than $10 billion in total assets as of December 31, 2019, to use the assets on that date to determine the applicability of various regulatory asset thresholds during 2020 and 2021. Although our assets exceeded $10 billion at December 31, 2021, the earliest we would have to comply with the risk-based capital rules would be September 30, 2022. If total assets exceed $10 billion after the dates provided in the interim rule, the Company is prepared to address the additional regulatory requirements and does not expect it to have significant financial implications.

Management believes, as of December 31, 2021 and 2020, that the Company, Merchants Bank, and FMBI met all the regulatory capital adequacy requirements with CBLR to be classified as well-capitalized, and management is not aware of any conditions or events since the most recent regulatory notification that would change the Company’s, Merchants Bank’s, or FMBI’s category.

Failure to exceed the leverage ratio threshold required under CBLR in the future, subject to any applicable grace period, would require the Company, Merchants Bank, and/or FMBI to return to the risk-based capital ratio thresholds previously utilized under the fully phased-in Basel III Capital Rules to determine capital adequacy.

Contractual obligations

The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities as of December 31, 2021. The payment amounts represent those amounts contractually due to the recipients.

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Borrowings are fully described in Note 13 of the Consolidated Financial Statements as of December 31, 2021 and 2020. Operating lease obligations are in place primarily for facilities and land on which banking facilities are located. See Note 25 of our Consolidated Financial Statements as of December 31, 2021, 2020, and 2019 for additional information.

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.

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For 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.

We have not engaged in any other off-balance-sheet transactions in the normal course of our lending activities.

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.

As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period until December 31, 2022, at the latest. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is included in net interest income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The analysis has two components, specific and general allowances. The specific allowance is for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a specific reserve is established for the difference. The general allowance, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes historical loss percentages and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could misstate the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

Servicing Rights. Mortgage 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.

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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 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, 2021, see Note 28 of our Consolidated Financial Statements “Recent Accounting Pronouncements.”

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