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TABLE OF CONTENTS
Index to Consolidated Financial Statements of Merchants Bancorp

Table of Contents

As filed with the Securities and Exchange Commission on September 25, 2017.

Registration No. 333-            


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933



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

Indiana   6022   20-5747400
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer Identification No.)

11555 North Meridian Street, Suite 400
Carmel, Indiana 46032
(317) 569-7420
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)



John F. Macke
Principal Financial Officer
Merchants Bancorp
11555 North Meridian Street, Suite 400
Carmel, Indiana 46032
(317) 569-7420
(Name, address, including zip code and telephone number, including area code, of agent for service)



Copies to:

Michael J. Messaglia   Frank M. Conner III
Robert J. Wild   Michael P. Reed
Krieg DeVault LLP   Covington & Burling LLP
One Indiana Square, Suite 2800   One CityCenter
Indianapolis, Indiana 46204   850 Tenth Street, NW
(317) 636-4341   Washington, D.C. 20001
    (202) 662-6000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

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

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a smaller reporting company)
  Smaller reporting company o

Emerging growth company ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. o



CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of
Securities to be Registered

  Proposed Maximum
Aggregate
Offering Price(1)(2)

  Amount of
Registration Fee

 

Common Stock, without par value per share

  $115,000,000   $13,328.50

 

(1)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. This amount represents the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the Registrant.

(2)
Includes the aggregate offering price of additional shares that may be purchased by the underwriters pursuant to their option to purchase additional shares from the Registrant.



The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

   


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 2017

PRELIMINARY PROSPECTUS

                Shares

LOGO

Common Stock

        This prospectus relates to the initial public offering of Merchants Bancorp. We are a diversified bank holding company headquartered in Carmel, Indiana.

        Prior to this offering, there has been no established public market for our common stock. We anticipate that the public offering price of our common stock will be between $            and $            per share. We have applied to list our common stock on the Nasdaq Capital Market under the trading symbol "MBIN."

        Investing in our common stock involves risk. See "Risk Factors" beginning on page 17.

        We are an "emerging growth company" under the federal securities laws and will be subject to reduced public company reporting requirements. See "Implications of Being an Emerging Growth Company."

 
  Per Share   Total  

Initial public offering price

  $     $    

Underwriting discounts

             

Proceeds to us, before expenses

             

        We have granted the underwriters an option to purchase up to an additional            shares from us at the initial public offering price, less the underwriting discounts, within 30 days from the date of this prospectus.

        Neither the Securities and Exchange Commission nor any other state securities commission nor any other regulatory authority has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

        Shares of our common stock are not savings accounts or deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

        The underwriters expect to deliver the shares of our common stock against payment in New York, New York, on or about                , 2017.

Sandler O'Neill + Partners, L.P.   Stephens Inc.   Raymond James

SunTrust Robinson Humphrey

   

The date of this prospectus is                , 2017.


Table of Contents


TABLE OF CONTENTS

About This Prospectus

    ii  

Market And Industry Data

    ii  

Implications Of Being An Emerging Growth Company

    ii  

Prospectus Summary

    1  

Risk Factors

    17  

Cautionary Note Regarding Forward-Looking Statements

    38  

Use Of Proceeds

    40  

Dividend Policy

    41  

Capitalization

    42  

Dilution

    43  

Price Range Of Our Common Stock

    44  

Selected Historical Consolidated Financial Data

    45  

Non-GAAP Financial Measures

    47  

Management's Discussion And Analysis Of Financial Condition And Results of Operations

    48  

Business

    83  

Supervision And Regulation

    97  

Management

    107  

Executive Compensation

    115  

Certain Relationships And Related Party Transactions

    124  

Security Ownership Of Certain Beneficial Owners And Management

    126  

Description Of Capital Stock

    128  

Shares Eligible For Future Sale

    134  

Material United States Federal Income Tax Considerations For Non-U.S. Holders

    136  

Underwriting

    141  

Legal Matters

    146  

Experts

    146  

Where You Can Find More Information

    146  

Index To Consolidated Financial Statements

    F-1  



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ABOUT THIS PROSPECTUS

        You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize to be delivered to you. We and the underwriters have not authorized anyone to provide you with different or additional information. We and the underwriters are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

        Unless we state otherwise or the context otherwise requires, references in this prospectus to "we," "our," "us" or "the Company" refer to Merchants Bancorp, an Indiana corporation, and our consolidated subsidiaries, references to "Merchants Bank" or the "Bank" refer to our banking subsidiary, Merchants Bank of Indiana, an Indiana state chartered bank, references to "P/RMIC" refer to the Bank's subsidiary, P/R Mortgage and Investment Corp., an Indiana corporation, references to "RICHMAC" refer collectively to P/RMIC's subsidiaries, RICHMAC Holdings, LLC, an Indiana limited liability company and RICHMAC Funding, LLC, a Delaware limited liability company, references to "NMF" refer to the Bank's subsidiary, Natty Mac Funding, Inc., an Indiana corporation, references to "Midtown West" refer to the Bank's subsidiary, MBI Midtown West, LLC, an Indiana limited liability company, and references to "Ash Realty" refer to the Bank's subsidiary, Ash Realty Holdings, LLC.


MARKET AND INDUSTRY DATA

        Within this prospectus, we reference certain market, industry and demographic data and other statistical information. We have obtained this data and information from various independent, third party industry sources and publications. Nothing in the data or information used or derived from third party sources should be construed as advice. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable, but have not independently verified them. Statements as to our market position are based on market data currently available to us. Although we are not aware of any misstatements regarding the economic, employment, industry and other market data presented herein, these estimates involve inherent risks and uncertainties and are based on assumptions that are subject to change.


IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

        As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

    we may present as few as two years of audited financial statements and two years of related management discussion and analysis of financial condition and results of operations;

    we are exempt from the requirement to obtain an attestation and report from our auditors on management's assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002;

    we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

    we are not required to give our shareholders non-binding advisory votes on executive compensation or golden parachute arrangements.

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        In this prospectus we have elected to take advantage of the reduced disclosure requirements relating to executive compensation and the number of years of financial information presented, and in the future we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.07 billion in non-convertible debt and (iv) the date on which we are deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

        In addition to the relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We intend to take advantage of this extended transition period.

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PROSPECTUS SUMMARY

        This summary highlights selected information contained elsewhere in this prospectus and may not contain all of the information that you should consider before investing in our common stock. Before making an investment decision you should carefully read the entire prospectus, including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," together with our consolidated financial statements and the related notes that are included herein.

Our Company 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 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 June 30, 2017, we had $3.1 billion in assets, $2.8 billion of deposits and $226.5 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 us with synergies across our lines of business.

Experienced Board and Management Team

        Our founders, Michael Petrie and Randall Rogers, each have over 38 years of industry experience. Prior to founding Merchants, Mr. Petrie and Mr. Rogers worked together as Merchants Mortgage Corporation, a company founded by Mr. Rogers, with Mr. Rogers as Chief Executive Officer and Mr. Petrie as Executive Vice President.

        In addition to our founders, the other members of our executive management team collectively have, on average, over 27 years of industry experience, each with a diverse and complementary background that is an integral part of our success. Michael Dunlap, the President and Co-Chief Operating Officer of Merchants Bank, has primarily been responsible for establishing our warehouse lending platform and Merchants Mortgage, and previously served in senior management and financial roles for several mortgage companies, including as Chief Financial Officer of National City Mortgage. John Macke, our Chief Financial Officer, previously served as Executive Vice President of Capital Markets and as Chief Financial Officer of Stonegate Mortgage Corporation. Scott Evans, President of Merchants Bank's Lynn Market and Co-Chief Operating Officer, has extensive experience in community banking, including as Vice President of The Farmers State Bank for over 10 years, and is primarily responsible for our Banking segment, including our agriculture lending activities. Michael Dury, the Executive Vice President and Chief Operating Officer of P/RMIC, oversees P/RMIC's strategy and business development for multi-family and healthcare financing activities and since 2010 has originated over $3 billion of multi-family loan volume. For more information on our executive management team, see the "Management" section below in this prospectus. The below table provides a

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summary of our executive management team and reflects each member's respective current ownership of our common stock as of August 31, 2017.

Name
  Title   Age   Years in
Financial Services
  Years with
the Company
  Ownership  

Michael F. Petrie

  Chairman and Chief Executive Officer of Merchants and Merchants Bank     63     38     27     46.53 %(1)

Randall D. Rogers

 

President and Chief Operating Officer of Merchants, Vice Chairman of Merchants Bank

   
71
   
48
   
27
   
44.84

%(2)

Michael J. Dunlap

 

President and Co-Chief Operating Officer of Merchants Bank

   
51
   
25
   
8
   
*
 

John F. Macke

 

Chief Financial Officer of Merchants and Merchants Bank

   
52
   
25
   
0
   
 

Michael R. Dury

 

Executive Vice President and Chief Operating Officer of P/RMIC

   
32
   
10
   
10
   
*
 

Scott A. Evans

 

Lynn Market President and Co-Chief Operating Officer of Merchants Bank

   
52
   
28
   
13
   
*
 

Susan D. Kucer

 

Indianapolis Market President of Merchants Bank

   
62
   
35
   
2
   
 

Jerry F. Koors

 

President of Merchants Mortgage

   
53
   
26
   
4
   
*
 

Richard L. Belser

 

Senior Vice President and Senior Credit Officer of Merchants Bank

   
66
   
43
   
10
   
 

Bill D. Buchanan

 

Senior Vice President and Chief Accounting Officer of Merchants and Merchants Bank

   
59
   
29
   
3
   
*
 

Kevin T. Langford

 

Senior Vice President and Chief Administrative Officer of Merchants Bank

   
49
   
27
   
1
   
 

TOTAL

               
91.57

%(3)

AVERAGE

   
30.36
   
9.55
       

*
denotes less than 1%

(1)
Includes 38.58% beneficially owned by Mr. Petrie's wife, Jody J. Petrie. See "Security Ownership of Certain Beneficial Owners and Management" for additional information.

(2)
Includes 43.59% beneficially owned by Mr. Rogers' wife, Mary H. Rogers. See "Security Ownership of Certain Beneficial Owners and Management" for additional information.

(3)
Includes 82.17% beneficially owned by Mr. Petrie's or Mr. Rogers' wives as described in (1) and (2) above.

        Upon the closing of this offering, Messrs. Petrie and Rogers, together with their families, will hold approximately        % of our outstanding common stock. Therefore, Messrs. Petrie and Rogers, together with their families, will have the ability to control the outcome of matters submitted to our shareholders for approval, including the election or removal of directors and the amendment of our articles of incorporation, along with approval of significant transactions. This control position may conflict with the interests of some or all of our other shareholders. In addition, Messrs. Petrie and Rogers, together with their families, own approximately 24.02% of our outstanding 8% Non-Cumulative, Perpetual Preferred Stock.

        Our five non-executive directors are all successful business owners, professionals or senior executives with long-standing ties to their communities. The collective professional background of our

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directors provides us with valuable insights into the business and banking needs of our customer base. After the completion of this offering, our five non-executive directors and their affiliated entities, collectively, are expected to own approximately        % of our outstanding common stock.

Our Growth

        Since our acquisition of Merchants Bank (formerly known as Greensfork Township State Bank), with assets of $6.7 million in March 2002, we have achieved significant growth in many of our key financial performance categories. During this period, we have maintained an acute focus on building profitable and complementary business lines that provide for insulation from cyclical swings and create synergies within our lines of business that give us competitive advantages. Since December 31, 2012, we have seen significant growth in our total assets, total gross loans and total deposits. Between December 31, 2012 and June 30, 2017, our total assets have grown at a compound annual growth rate of 30.4%, from $936 million to $3.1 billion, and we increased total gross loans (including loans held for investment and loans held for sale) at a compound annual growth rate of 32.3%, from $583 million to $2.1 billion. We have funded our growth during this period, in large part, through a substantial increase in deposits, which we have increased from $815 million to $2.8 billion, a compound annual growth rate of 31.3%.

        Our growth thus far is due primarily to the consistent production and efficiency of P/RMIC and the scalable growth of our warehouse lending line of business. P/RMIC has grown the unpaid principal balance of its servicing portfolio from $2.8 billion as of December 31, 2012 to $6.2 billion as of June 30, 2017, while our warehouse lending funded volumes have grown from $8.3 billion in 2012 to $24.8 billion in 2016. Over the same period of time we have experienced low levels of non-performing assets and charge-offs, driven principally by the nature of our lending business and our focus on originating assets with favorable risk profiles.

Total Assets
($ in Millions)
  Total Gross Loans
($ in Millions)
  Total Deposits
($ in Millions)

GRAPHIC

 

GRAPHIC

 

GRAPHIC
Nonperforming Assets / Total Assets   Net Charge-offs / Average Loans

GRAPHIC

 

GRAPHIC

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        During every period since January 1, 2012, as shown in the chart below, we have maintained a return on average assets above 1.23%, a return on average tangible common equity over 19%, and an efficiency ratio under 33%. We were able to achieve these metrics despite historically earning a lower net interest rate margin than most banks, which is caused by originating low risk, shorter-term assets.

Return on Average
Assets(1)
  Return on Average
Tangible Common Equity(1)

GRAPHIC

 

GRAPHIC
Efficiency Ratio   Net Interest Margin

GRAPHIC

 

GRAPHIC

(1)
In 2014, for federal income tax purposes, we converted from a Subchapter S corporation to a C corporation. The 2012 and 2013 performance metrics reflect adjustments to net income to enhance comparability with subsequent years. Specifically, for 2012 and 2013, we adjusted net income for pro-forma federal and state corporate income tax expenses to which we were subject following our conversion to a C corporation, using an assumed income tax rate of 40%. Net income also was adjusted for 2014 to reverse the charge we recorded for the conversion of deferred tax liabilities in connection with our conversion from a Subchapter S to C corporation. These pro-forma net income metrics are non-GAAP financial measures. Refer to "Non-GAAP Financial Measures" for additional discussion regarding pro-forma net income and a reconciliation of this metric to net income.

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Our Corporate Structure

        We have multiple lines of business and provide various banking and financial services through our subsidiaries as follows:

    P/R Mortgage & Investment Corp. (a subsidiary of Merchants Bank)

    Multi-Family Rental Housing

    Healthcare Financing

    Servicing and Subservicing

    RICHMAC Funding, LLC (a subsidiary of P/RMIC)

    Multi-Family Rental Housing

    Merchants Bank of Indiana

    Warehouse Financing and Loan Participations

    Commercial Lending

    Retail Banking

    SBA Small Business Loan Programs

    Agricultural Lending

    Merchants Mortgage

    Single-Family Mortgage Lending

    Correspondent Mortgage Banking

    Natty Mac Funding, Inc. (a subsidiary of Merchants Bank)

    Warehouse Financing and Loan Participations

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GRAPHIC

P/RMIC: Multi-Family Rental Housing, Healthcare Financing and Servicing

        P/RMIC is 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.

        P/RMIC originated $1.2 billion in loans during 2016 and $906 million during the six months ended June 30, 2017. P/RMIC primarily originates FHA loans that are sold as Government National Mortgage Association ("Ginnie Mae") mortgage backed securities within approximately 30 days. The loans are sold and the mortgage servicing rights are retained. Other originations include bridge and permanent financing that are referred to the Banking segment. These loans eventually become permanent FHA financings by P/RMIC. In addition to the $1.2 billion originated directly by P/RMIC, we also funded loans brought to us by non-affiliated entities. As of June 30, 2017, P/RMIC's servicing portfolio totaled $6.2 billion, which includes both owned and subserviced loans.

        We generated approximately $22.6 and $23.0 million, or 41.9% and 27.9%, of net revenue (net interest income plus non-interest income) from our Multi-family Mortgage Banking segment for the six months ended June 30, 2017 and year ended December 31, 2016, respectively.

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RICHMAC Funding, LLC

        In August 2017, P/RMIC acquired RICHMAC Funding, LLC, a national multi-family housing mortgage lender, to complement and expand the products and services offered by P/RMIC.

MERCHANTS BANK

Warehouse Financing and Loan Participations

        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 in the country. As of June 30, 2017, Merchants Bank and NMF had $1.2 billion in loans outstanding from warehouse lines for credit to single and multi-family lenders and loan participations. We generated approximately $17.7 and $35.3 million, or 32.9% and 42.8%, of net revenue (net interest income plus non-interest income) from our Mortgage Warehousing segment for the six months ended June 30, 2017 and year ended December 31, 2016, respectively.

Commercial Lending and Retail Banking

        Merchants Bank operates under an Indiana charter and provides full banking services. Merchants Bank has five depository branches located in Carmel, Indianapolis and Lynn, Indiana. Merchants Bank holds loans in its portfolio comprised of multi-family construction and bridge loans referred by P/RMIC, 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.

SBA Lending

        Merchants Bank participates in the Small Business Administration's ("SBA") 7(a) program in order to meet the needs of our small business community, and help diversify our retail revenue stream. We originate and service, as well as sell the guaranteed portion of these loans. As of June 30, 2017, Merchants Bank had originated $4.5 million in SBA 7(a) loans in Marion and Hamilton counties in Central Indiana since our participation in this program.

        The SBA's 7(a) program provides up to a 75% guaranty for loans greater than $150,000. For loans $150,000 or less, the program provides up to an 85% guaranty. The maximum 7(a) loan amount is $5 million. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program. We typically sell in the secondary market the SBA-guaranteed portion (generally 75% of the principal balance) of the loans we originate.

Agricultural Lending

        Merchants Bank has a division ("MBI-Lynn") located in Lynn, Randolph County, Indiana with its primary business function to provide agricultural loans within its designated Community Reinvestment Act ("CRA") area of Randolph and Wayne counties in Eastern Indiana and nearby Darke County, Ohio. Merchants Bank offers operating lines of credit for crop and livestock production, intermediate term financing to purchase equipment and breeding livestock and long-term financing to purchase agricultural real estate. As of June 30, 2017, of the $66.4 million of agricultural loans in our portfolio, including undisbursed funds of $4.3 million, 48.2% have a Farm Service Agency ("FSA") 90% guarantee. Merchants Bank is approved to sell agricultural loans in the secondary market through the

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Federal Agricultural Mortgage Corporation ("Farmer Mac") and uses this relationship to manage interest rate risk within the agricultural loan portfolio. As of June 30, 2017, Merchants Bank sold agricultural loans with an aggregate principal balance of $13.5 million to Farmer Mac without recourse. Merchants Bank has written off less than $25 thousand in loan loss in its agricultural loan portfolio since December 31, 2004.

MERCHANTS MORTGAGE: Single Family Mortgage Lending, Correspondent Lending and Servicing

        Merchants Mortgage is the branded arm and division of Merchants Bank that is a full service single-family mortgage origination and servicing platform started in February 2013. Merchants Mortgage is both a retail and correspondent mortgage lender. Merchants Mortgage offers agency eligible, jumbo fixed and hybrid adjustable rate mortgages for purchase or refinancing. Other products include construction, bridge and lot financing and home equity lines of credit ("HELOC"), including the All-in-One product, which links a customer's checking account balance to a first lien HELOC. Merchants Mortgage generates revenues from fees charged to borrowers, interest income during the warehouse period, and gain on sale of loan to investors. There are multiple investor outlets, including direct sale capability to Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal Home Loan Bank of Indianapolis (the "FHLBI"), and other third-party investors to allow Merchants Mortgage a best execution at sale. Merchants Mortgage also originates loans held for investment and earns interest income over the life of the loan.

NMF: Warehouse Financing and Loan Participations

        Through NMF we engage in loan participations and warehouse financing with Home Point Financial Corporation ("Home Point") and its subsidiaries and correspondent customers. NMF was established as a wholly owned subsidiary of Merchants Bank in 2014. 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.

MIDTOWN WEST

        MBI Midtown owns land upon which we expect to build our new corporate headquarters building in Carmel, Indiana.

ASH REALTY

        Ash Realty holds assets acquired through, or in lieu of, loan foreclosures. At June 30, 2017, there were no assets held in Ash Realty.

ARCLINE FINANCIAL, LLC

        Merchants owns 30% of Arcline Financial, LLC ("Arcline") and is accounted for using the equity method of accounting. Arcline processes warehouse and correspondent lending transactions, including on behalf of Merchants Bank.

Our Strategic Plan

        Our strategic plan focuses on continuing to grow complementary business lines that will provide a diverse and stable revenue platform and create a balance between interest and non-interest income. Our strategic plan reflects our belief that our mortgage business and community banking structure

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complement one another by creating important operational and revenue synergies. Our strategic plan includes five initiatives:

    maintain and grow complementary and diversified business lines;

    develop deep customer relationships;

    execute prudent acquisitions in strategic areas;

    hire experienced and talented personnel while developing talented personnel from within our organization; and

    maintain a low risk profile through strong enterprise-wide risk management.

        We have achieved our recent growth through focused and sustained execution of these initiatives, and we believe that we have an experienced management team in place that will allow us to continue this success.

Our Competitive Strengths

        We believe our competitive strengths set us apart from many similarly sized community banks and mortgage banking companies, and include the following key attributes:

        Diversified business lines within our mortgage banking business.    Our primary business lines within our mortgage banking business are complementary and provide a diverse and stable source of revenue. Our subsidiaries and divisions are integrated and offer opportunities for operational and revenue synergies. For example, Merchants Bank provides short-term lending support for P/RMIC originations in the form of bridge or construction financing. P/RMIC, in turn, deposits custodial escrow servicing accounts at Merchants Bank, which can be invested in securities and pledged to the FHLBI for additional funding capacity. Although we are exposed to the systemic risk in the mortgage market and the economy as a whole, our performance is not directly correlated with mortgage origination volumes. For example, for the year ended December 31, 2016, our mortgage warehouse lending funding volumes increased by 23%, while the mortgage market as a whole increased by 13%. In addition, for the six months ended June 30, 2017 our mortgage warehouse lending volumes increased 4.3% compared to the six months ended June 30, 2016, while the mortgage market as a whole decreased by 4.2% (based on market volumes from Mortgage Bankers Association of America). We largely attribute our ability to succeed under various market conditions to our low efficiency ratio, which is mainly a result of our variable cost operating model, and our balanced presence in single and multi-family finance. In rising rate environments, single family mortgage origination volumes may fall, however this should be offset through increased net interest margin. Additionally, as market interest rates rise, originations for multi-family housing may decrease, but the value of our servicing asset increases due to a lesser expectation of prepayment. In falling rate environments, we may expect to see increased gain on sale income from purchase and refinance originations in both the single and multi-family mortgage markets to offset a potential decrease in the value of our servicing asset due to higher prepayments. Thus, Merchants Mortgage's position in the single-family and P/RMIC's position in multi-family housing sector offers us an alternative against variability in the mortgage industry.

        Stable source of non-interest income reduces risks associated with changes in interest rates.    Just as we strive to have diversification within our business lines, we also strive to maintain a complementary and diversified revenue model. We believe that this balanced revenue stream approach can help minimize volatility in our earnings through various economic and interest rate cycles. As a result, we do not have an undue reliance on one source of income, such as net interest income, which can be materially affected by changes in interest rates, or non-interest income, which can be materially affected by reductions in mortgage volumes. Historically, P/RMIC earned fees and servicing income (non-interest income) that greatly outweighed the interest income earned by Merchants Bank. We recognize our

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reliance on this revenue stream and have implemented strategies to augment the revenue. Since 2012, we have increased our portfolio of loans held for investment to balance our income and to reduce our reliance on a single source of income.

 
  For the
Six Months
Ended June 30,
  For the Year Ended December 31,  
(Dollars in thousands)
  2017   2016   2016   2015   2014   2013   2012  
 
  (unaudited)
   
   
   
   
   
 

Net Interest Income

  $ 29,255   $ 23,819   $ 53,971   $ 42,055   $ 30,630   $ 25,708   $ 20,710  

Non-Interest Income

    24,717     9,951     28,504     27,008     20,263     27,284     36,121  

Revenue

  $ 53,972   $ 33,770   $ 82,475   $ 69,063   $ 50,893   $ 52,992   $ 56,831  

Net Interest Income / Revenue

    54 %   71 %   65 %   61 %   60 %   49 %   36 %

Non-Interest Income / Revenue

    46 %   29 %   35 %   39 %   40 %   51 %   64 %

        Low cost and stable source of funds.    Merchants Bank funds its loans, including its participation agreements and warehouse lines of credit, using funds generated primarily from mortgage related custodial deposits. Merchants Bank's cost of total deposits was 0.70% for the six months ended June 30, 2017 and its total cost of funds was 0.98% for the six months ended June 30, 2017. Custodial funds come from Merchants Bank's non-depository financial institution clients, such as servicing related escrow deposits for insurance and property taxes. These deposits are stable because the sources of the deposits have significant borrowing relationships with Merchants Bank that it expects will continue. Merchants Bank may elect not to participate or fund loans in the event these customers decide to remove the deposits, thus we can better manage our assets with our liabilities. Merchants Bank also uses brokered deposits as a source of funding to make up for any funding gap with warehouse volumes or timing of mortgage custodial remittances. These deposits are short term and typically have maturities of up to three months to match the temporarily higher volumes in warehouse volumes and custodial remittances. Further, in the event Merchants Bank's deposits were insufficient to meet its customers' borrowing needs, Merchants Bank has available liquidity through cash reserves and available borrowing capacity of $386.4 million through the FHLBI as of June 30, 2017.

        Sophisticated risk management platform.    Our largest source of interest income is Merchants Bank's warehouse financing business, which we have structured to minimize risk. Merchants Bank underwrites mortgage companies ("lenders") prior to entering into a warehouse lending agreement. Merchants Bank uses two different arrangements to fund agency eligible, government insured or guaranteed, or jumbo residential mortgage loans secured by mortgages placed on existing one-to-four family dwellings. The majority of our loans are funded under a participation agreement whereby Merchants Bank elects to purchase a participation interest of up to 100% in individual loans and shares proportionately in the interest income until the loan is sold in the secondary market. Merchants Bank also will fund loans under a warehouse line of credit as a secured financing. The warehouse arrangement is secured by a combination of the funded mortgage loans, cash deposits and personal guarantees of the originating lender, and Merchants Bank's initial disbursement of less than 100% of the loan amount. Merchants Bank's risk mitigation procedures include possession of collateral until the loan is sold and Merchants Bank directly receives the proceeds from the secondary market investor. In addition, prior to funding Merchants Bank reviews each loan to confirm its agency eligibility status and uses vendors to further validate loans as well as to hold the collateral securing the loan. Loans typically are sold by lenders to a third-party investor within approximately 20 days of funding, allowing Merchants Bank to minimize its risk that a loan will default prior to sale. The lenders sell most of these loans individually or through government sponsored entities ("GSEs") (i.e., Fannie Mae, Freddie Mac, and Ginnie Mae) mortgage backed securities programs to large financial institutions or to GSEs, as the end investors. This relatively short turnover time is also part of what keeps our balance sheet assets repricing to the current rate environment and helps us manage interest rate risk, as discussed below.

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        Minimizing interest rate exposure.    We believe that we appropriately minimize the potential for risk in our investment and loan portfolios, including risks associated with an increase in interest rates given the structure and composition of these portfolios. Our securities portfolio consists primarily of callable, government-backed securities with maturities of two years or less, all of which are available for sale. Our loan portfolio is comprised predominantly of variable interest rates or short maturities, which allows the interest rates to change with the market. As of June 30, 2017, 78.7% of Merchants Bank's assets reprice in less than 90 days. In our multi-family financing business, the vast majority of loans are sold into the secondary market with P/RMIC retaining servicing rights. P/RMIC also avoids "locking in" interest rates significantly in advance of loan closings, which further minimizes interest rate risk prior to closing of the loans.

        Innovative mortgage warehouse lending platform.    We believe that Merchants Bank has an innovative warehouse lending platform that may be considered an industry leader. We have the capability to fully fund electronic mortgages through our E-Note program, one of only seven lenders in the country approved by Freddie Mac to offer this solution. We are highly responsive to our customers' needs by offering mortgage servicing rights ("MSRs") and operating lines of credit selectively to warehouse lending customers. The lines of credit secured by MSR's lead to the potential for additional deposits as the customer increases its servicing portfolio. In addition, customer service is especially important in the warehouse lending business because customers need to be able to rely, with confidence, on a readily accessible, stable source of funds given the timing realities of meeting and honoring mortgage loan closings or purchases. We believe that our mortgage banking expertise and experience, size and low overhead costs permit us to be responsive to customers on a level that many larger banks are unable to match. These factors contribute to Merchants Bank providing warehouse facilities to some of the leading non-depository institutions in the country.

Recent Acquisition

        RICHMAC Funding, LLC.    We entered into a Member Interests Purchase Agreement dated June 26, 2017, to acquire 100% of the equity interests of RICHMAC Funding, LLC, a Delaware limited liability company. We closed the acquisition on August 15, 2017, and issued 383,271 shares of our common stock in exchange for 100% of the equity interests of RICHMAC. The acquisition is expected to allow P/RMIC through RICHMAC to operate as a Fannie Mae Affordable Lender and a Freddie Mac Targeted Affordable Housing (TAH) Seller/Servicer. In addition, we acquired a Fannie Mae and Freddie Mac servicing portfolio as part of the transaction. The acquisition is expected to provide additional product offerings, such as the Freddie Mac Bridge to Resyndication and the Fannie Mae Tax Exempt Bond Credit Enhancement, to current customers as well as broaden the origination network into attractive markets where we do not currently have a presence. RICHMAC currently operates principally in Minneapolis, Minnesota and New York, New York.

Pending Acquisition

        Joy State Bank.    On October 31, 2016, we entered into an Agreement and Plan of Merger to acquire Joy State Bank, an Illinois chartered bank located in Joy, Illinois. Since the timing and approval of the transaction was uncertain due to our capital position at September 30, 2016, on December 22, 2016 the Agreement and Plan of Merger was amended and the parties agreed that Michael Petrie and Randall Rogers, two of our directors and executive officers, would acquire Joy State Bank. The acquisition of Joy State Bank by Messrs. Petrie and Rogers received appropriate regulatory approvals and closed on April 3, 2017. On May 8, 2017, we entered into a Stock Purchase Agreement with Messrs. Petrie and Rogers to acquire Joy State Bank. The acquisition is expected to provide access to the Mortgage Partnership Finance (MPF) Program, an attractive program offered through the Federal Home Loan Bank of Chicago which Merchants Bank, as an Indiana chartered state bank, cannot access. We have agreed to pay a purchase price of approximately $5.4 million plus $16,403 for

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each 30 days after June 30, 2017, prorated to the closing date. The purchase price is equal to the price paid by Messrs. Petrie and Rogers, plus expenses and a cost of funds equal to 3.75%. The acquisition has been approved by the Federal Reserve Bank of Chicago, but remains subject to the approval of the Illinois Department of Financial and Professional Regulation, Division of Banking. We expect to close this acquisition in the first quarter of 2018.

Risks Relating to Our Company

        Our ability to implement our strategic plan and the success of our business are subject to numerous risks and uncertainties, which are discussed in the section titled "Risk Factors," beginning on page 17, and include, but are not limited to, the following:

    decreased residential and multi-family mortgage origination, volume and pricing decisions of competitors, and changes in interest rates, may adversely affect our profitability;

    our mortgage banking profitability could significantly decline if we are not able to originate and resell a high volume of mortgage loans;

    fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations;

    because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses; and

    liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.

Corporate Information

        Our principal executive offices are located at 11555 North Meridian Street, Suite 400, Carmel, Indiana 46032, and our telephone number at that address is (317) 569-7420. Our website address is www.merchantsbankofindiana.com. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.

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THE OFFERING

Common stock offered by us

              shares

Underwriters' option to purchase additional shares of our common stock

 

            shares

Common stock outstanding after completion of this offering

 

            shares (or            shares if the underwriters exercise in full their option to purchase additional shares of our common stock).

Use of proceeds

 

Assuming an initial public offering price of $            per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $            million (or approximately $            million if the underwriters exercise their option to purchase additional shares in full). We intend to contribute $            million of the net proceeds that we receive from this offering to Merchants Bank to support balance sheet growth, and to use the remainder for general corporate purposes, which could include future acquisitions and other growth initiatives. We also intend to use approximately $5.8 million to complete the pending acquisition of Joy State Bank. See "Use of Proceeds" and "Business—Pending Acquisition—Joy State Bank."

Dividends

 

It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally maintain our current dividend levels. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, payment of dividends on our preferred stock, contractual restrictions and any other factors that our board of directors may deem relevant. See "Dividend Policy."

Nasdaq listing

 

We have applied to list our common stock on the Nasdaq Capital Market under the trading symbol "MBIN."

Risk factors

 

Investing in shares of our common stock involves a high degree of risk. See "Risk Factors" beginning on page 17 for a discussion of certain factors you should consider carefully before deciding to invest.

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Directed Share Program

 

At our request, the underwriters have reserved for sale, at the initial public offering price, up to                shares of the common stock being offered by this prospectus, to our directors, officers, employees and other individuals that have a business relationship with us, including current shareholders and customers, and their family members who have expressed an interest in purchasing our common stock in this offering. See "Underwriting."

        Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock to be outstanding immediately after the completion of this offering is based on 21,497,667 shares outstanding as of August 31, 2017, as adjusted for the 2.5 for 1 stock split that was effective July 6, 2017, and:

    excludes 17,910 shares of unvested restricted stock (as adjusted for the 2.5 for 1 stock split that was effective July 6, 2017); and

    excludes 1,500,000 shares of common stock available for future awards under our 2017 Equity Incentive Plan.

        Except as otherwise indicated, all information in this prospectus:

    assumes an initial public offering of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus; and

    assumes no exercise by the underwriters of their option to purchase additional shares of our common stock.

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

        The following table sets forth our summary historical consolidated financial data as of the dates and for the periods shown. The summary balance sheet data as of December 31, 2016 and 2015 and the summary income statement data for the years ended December 31, 2016 and 2015 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary historical consolidated financial data as of and for the years ended December 31, 2014, 2013 and 2012 from our audited financial statements not included in this prospectus. The summary consolidated financial data as of June 30, 2017 and for the six months ended June 30, 2017 and 2016 is derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus and includes all normal and recurring adjustments that we consider necessary for a fair presentation. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

        You should read the following financial data in conjunction with the other information contained in this prospectus, including "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes included elsewhere in this prospectus.

 
  At or for the Six
Months Ended June 30,
  At or for the Year Ended December 31,    
(Dollars in thousands, except per share data)
  2017   2016   2016   2015   2014   2013   2012    
 
  (unaudited)
   
   
   
   
   
   

Balance Sheet Data

                                             

Total Assets

  $ 3,091,500   $ 2,506,974   $ 2,718,512   $ 2,269,442   $ 1,793,008   $ 1,179,791   $ 936,172    

Loans held for investment

    1,070,866     872,292     941,796     762,212     447,614     266,092     217,073    

Allowance for loan losses

    (6,865 )   (5,902 )   (6,250 )   (5,422 )   (4,458 )   (3,295 )   (2,854 )  

Loans held for sale

    983,420     818,404     764,503     620,583     736,667     542,571     365,444    

Deposits

    2,771,501     2,247,621     2,428,621     2,039,520     1,610,719     1,054,304     815,418    

Total liabilities

    2,864,987     2,329,701     2,512,224     2,121,242     1,682,872     1,060,976     841,864    

Total shareholder's equity

    226,513     177,273     206,288     148,200     110,137     118,814     94,308    

Tangible common equity

    184,409     148,226     164,184     137,677     109,614     118,291     93,785    

Income Statement Data

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

 

Interest Income

  $ 41,471   $ 32,421   $ 72,939   $ 56,345   $ 39,554   $ 31,659   $ 25,764    

Interest Expense

    12,216     8,602     18,968     14,290     8,924     5,951     5,054    

Net interest income

    29,255     23,819     53,971     42,055     30,630     25,708     20,710    

Provision for loan losses

    480     480     960     960     1,215     720     1,270    

Noninterest income

    24,717     9,951     28,504     27,008     20,263     27,284     36,121    

Noninterest expense

    14,902     12,163     26,720     20,922     15,796     13,328     12,504    

Income before taxes

    38,590     21,127     54,795     47,181     33,882     38,944     43,057    

Provision for income taxes

    14,702     8,353     21,668     18,798     30,079            

Net income, as previously reported

    23,888     12,774     33,127     28,383     3,803     38,944     43,057    

Non-GAAP Reconciliation:

                                             

Pro-forma adjustments:

                                             

Add back of tax effect of S Corp to C Corp conversion

                    16,431 (1)          

Less provision for income taxes

                        15,578 (2)   17,223 (2)  

Pro-forma net income

    23,888     12,774     33,127     28,383     20,234     23,366     25,834    

Preferred stock dividends

    1,665     407     2,002                    

Pro-forma net income available to common shareholders

  $ 22,223   $ 12,367   $ 31,125   $ 28,383   $ 20,234   $ 23,366   $ 25,834    

Credit Quality Data

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

 

Nonperforming loans

  $ 3,219   $ 2,195   $ 1,887   $ 887   $ 815   $ 490   $ 1,451    

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  At or for the Six
Months Ended June 30,
  At or for the Year Ended December 31,    
(Dollars in thousands, except per share data)
  2017   2016   2016   2015   2014   2013   2012    
 
  (unaudited)
   
   
   
   
   
   

Nonperforming loans to total loans

    0.30 %   0.25 %   0.20 %   0.12 %   0.18 %   0.18 %   0.67 %  

Nonperforming assets

  $ 3,219   $ 2,195   $ 1,887   $ 887   $ 815   $ 490   $ 1,451    

Nonperforming assets to total assets

    0.10 %   0.09 %   0.07 %   0.04 %   0.05 %   0.04 %   0.16 %  

Allowance for loan losses to total loans

    0.64 %   0.68 %   0.66 %   0.71 %   1.00 %   1.24 %   1.31 %  

Allowance for loan losses to nonperforming loans

    213.26 %   268.88 %   331.21 %   611.27 %   546.99 %   672.45 %   196.69 %  

Net charge-offs/(recoveries) to average loans

    (0.01 )%               0.02 %   0.12 %   0.14 %  

Per Share Data (Common Stock)

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

 

Basic and diluted earnings per share

                                             

As reported

  $ 1.05   $ 0.59   $ 1.47   $ 1.35   $ 0.19   $ 1.95   $ 2.15    

Pro-forma

  $ 1.05   $ 0.59   $ 1.47   $ 1.35   $ 1.01 (3) $ 1.17 (3) $ 1.29 (3)  

Dividends declared

  $ 0.10   $ 0.10   $ 0.20   $ 0.20   $ 0.95   $ 0.72   $ 0.44    

Book value

                                             

As reported

  $ 8.76   $ 7.05   $ 7.80   $ 6.55   $ 5.32   $ 5.94   $ 4.72    

Pro-forma

  $ 8.76   $ 7.05   $ 7.80   $ 6.55   $ 6.11 (4) $ 5.16 (5) $ 3.85 (5)  

Tangible book value

                                             

As reported

  $ 8.73   $ 7.02   $ 7.78   $ 6.52   $ 5.29   $ 5.92   $ 4.69    

Pro-forma

  $ 8.73   $ 7.02   $ 7.78   $ 6.52   $ 6.09 (4) $ 5.14 (5) $ 3.83 (5)  

Weighted average shares outstanding

                                             

Basic

    21,114,400     21,111,200     21,111,208     21,075,475     20,017,400     20,000,000     20,000,000    

Diluted

    21,119,411     21,112,283     21,113,435     21,075,475     20,017,400     20,000,000     20,000,000    

Shares outstanding at period end

    21,114,400     21,111,200     21,111,200     21,111,200     20,703,700     20,000,000     20,000,000    

Performance Metrics

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

 

Return on average assets

                                             

As reported

    1.74 %   1.05 %   1.24 %   1.32 %   0.25 %   3.18 %   4.81 %  

Pro-forma

    1.74 %   1.05 %   1.24 %   1.32 %   1.34% (4)   1.91% (5)   2.89% (5)  

Return on average equity

                                             

As reported

    22.00 %   16.52 %   18.68 %   22.62 %   3.71 %   37.07 %   57.86 %  

Pro-forma

    22.00 %   16.52 %   18.68 %   22.62 %   19.76% (4)   22.24% (5)   34.71% (5)  

Return on average tangible common equity

                                             

As reported

    25.40 %   17.18 %   20.50 %   22.73 %   3.73 %   37.25 %   58.27 %  

Pro-forma

    25.40 %   17.18 %   20.50 %   22.73 %   19.86% (4)   22.35% (5)   34.96% (5)  

Net interest margin

    2.23 %   2.03 %   2.07 %   2.02 %   2.12 %   2.19 %   2.41 %  

Efficiency ratio

    27.61 %   36.02 %   32.40 %   30.29 %   31.04 %   25.15 %   22.00 %  

Loans and loans held for sale to deposits

    74.12 %   75.22 %   70.26 %   67.80 %   73.52 %   76.70 %   71.44 %  

Capital Ratios—Merchants Bancorp

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

 

Tangible common equity to tangible assets

    6.0 %   5.9 %   6.0 %   6.1 %   6.1 %   10.0     10.0    

Common equity Tier 1 capital to risk-weighted assets

    7.4 %   7.4 %   8.1 %   8.5 %   N/A     N/A     N/A    

Tier 1 leverage ratio

    7.4 %   6.5 %   6.6 %   6.1 %   6.1 %   8.4 %   8.0 %  

Tier 1 capital to risk weighted assets

    9.3 %   8.9 %   10.3 %   9.2 %   7.7 %   11.9 %   18.0 %  

Total capital to risk-weighted assets

    9.6 %   9.2 %   10.6 %   9.6 %   8.1 %   12.2 %   18.0 %  

Regulatory Capital Ratios—Merchants Bank Only

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

 

Tier 1 common capital to risk-weighted assets

    11.7 %   12.0 %   13.2 %   12.9 %   N/A            

Tier 1 leverage ratio

    9.3 %   8.7 %   8.4 %   8.5 %   8.7 %   8.4 %   8.0 %  

Tier 1 capital to risk-weighted assets

    11.7 %   12.0 %   13.2 %   12.9 %   11.0 %   11.9 %   18.0 %  

Total capital to risk-weighted assets

    12.0 %   12.4 %   13.5 %   13.3 %   11.3 %   12.2 %   18.0 %  

(1)
Represents the recognition of deferred tax liabilities recorded upon conversion from a Subchapter S corporation to a regular C corporation.

(2)
Represents the pro-forma effects of income taxes using a 40% income tax rate, as we were a Subchapter S corporation in years prior to 2014.

(3)
Represents basic and diluted earnings per share calculated on pro-forma net income.

(4)
Represents pro-forma performance metrics calculated on net income as adjusted for the effects of the deferred tax liabilities recorded in connection with the conversion from Subchapter S to C corporation.

(5)
Represents pro-forma performance metrics calculated on net income as adjusted for the effects of income taxes included calculated using a 40% income tax rate for years previously reported as a Subchapter S corporation.

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. Before you decide to invest, you should carefully consider the risks described below, together with all other information included in this prospectus. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations and growth prospects. As a result, the trading price of our common stock could decline and you could experience a partial or complete loss of your investment. Further, to the extent that any of the information in this prospectus constitutes forward-looking statements, the risk factors below also are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See "Cautionary Note Regarding Forward-Looking Statements" beginning on page 38.

Risks Related to Our Business

Decreased residential and multi-family mortgage origination, volume and pricing decisions of competitors, and changes in interest rates, may adversely affect our profitability.

        We currently operate a residential and multi-family mortgage origination, warehouse financing, and servicing business. Changes in interest rates and pricing decisions by our loan competitors may adversely affect demand for our mortgage loan products, the revenue realized on the sale of loans, revenues received from servicing such loans and the valuation of our mortgage servicing rights.

Our mortgage banking profitability could significantly decline if we are not able to originate and resell a high volume of mortgage loans.

        Mortgage production, especially refinancing activity, declines in rising interest rate environments. Interest rates have been historically low over the last few years and this environment likely will not continue indefinitely. Moreover, when interest rates increase further, there can be no assurance that our mortgage production will continue at current levels. Because we sell a substantial portion of the mortgage loans we originate and purchase, the profitability of our mortgage banking business also depends in large part on our ability to aggregate a high volume of loans and sell them at a gain in the secondary market. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans or securities into that market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations.

        In addition, our ability to sell mortgage loans readily is dependent upon our ability to remain eligible for the programs offered by GSEs and other institutional and non-institutional investors. Any significant impairment of our eligibility with any of the GSEs could materially and adversely affect our operations. Further, the criteria for loans to be accepted under such programs may be changed from time to time by the sponsoring entity, which could result in a lower volume of corresponding loan originations. The profitability of participating in specific programs may vary depending on a number of factors, including our administrative costs of originating and purchasing qualifying loans and our costs of meeting such criteria.

        The ability for us and our warehouse financing customers to originate and sell residential mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by GSEs and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Because the largest participants in the secondary market are Fannie Mae and Freddie Mac, GSEs whose activities are governed by federal law, any future changes in laws that significantly affect the activity of these GSEs could, in turn,

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adversely affect our operations. In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. government. The federal government has for many years considered proposals to reform Fannie Mae and Freddie Mac, but the results of any such reform, and their impact on us, are difficult to predict. To date, no reform proposal has been enacted.

Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations.

        Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we pay on our liabilities, such as deposits, rises more quickly than the rate of interest that we receive on our interest-bearing assets, such as loans, which may cause our profits to decrease. The impact on earnings is more adverse when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates, leading to similar yields between short-term and long-term rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international economic weaknesses and disorder and instability in domestic and foreign financial markets.

        Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates.

        Our mortgage servicing rights assets typically have a ten year call protection, but as interest rates decrease, the potential for prepayment increases and the fair market value of our mortgage servicing rights assets may decrease. Our ability to mitigate this decrease in value is largely dependent on our ability to be the refinancier and retain servicing rights. While we have previously been successful in our servicing retention, we may not be able to achieve the same level of retention in the future.

        Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.

        Rising interest rates will result in a decline in value of the fixed-rate debt securities we hold in our investment securities portfolio. The unrealized losses resulting from holding these securities would be recognized in other comprehensive income (loss) and reduce total shareholders' equity. Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.

        If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall further, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This would have a material adverse effect on our net interest income and our results of operations.

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Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

        At June 30, 2017, approximately 81.4% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property's value or limit our ability to use or sell the affected property.

Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.

        Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. A source of our funds consists of our customer deposits, including escrow deposits held in connection with our multi-family mortgage servicing business. These deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors that may be outside of our control, such as a loss of confidence by customers in us or the banking sector generally, customer perceptions of our financial health and general reputation, increasing competitive pressures from other financial services firms for consumer or corporate customer deposits, changes in interest rates and returns on other investment classes. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.

        As of June 30, 2017, $819.7 million, or 29.6% of our total deposits, were concentrated in three large mortgage non-depository financial institutions. These concentration levels expose us to the risk that one of these depositors will experience financial difficulties, withdraw its deposits, or otherwise lose the ability to generate custodial funds due to business or regulatory realities. However, two of these institutions also have warehouse funding arrangements, providing us the opportunity to mitigate this risk by electing not to participate or fund an institution's loans in the event such institution removes its deposits. Nonetheless, failure to effectively manage this risk and subsequent reduction in the deposits of our significant customers could have a material impact on our ability to fund lending commitments or increase cost of funds, thereby decreasing our revenues.

        Additional liquidity is provided by brokered deposits and our ability to borrow from the FHLBI. As of June 30, 2017 brokered deposits were $687.3 million, or 24.8% of our total deposits. Brokered deposits may be more rate sensitive than 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 the Bank does not maintain its well-capitalized position, it may not accept or renew any

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brokered deposits without a waiver granted by the FDIC. We also may borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

        Additionally, as a bank holding company we are dependent on dividends from our subsidiaries as our primary source of income. Our subsidiaries are subject to certain legal and regulatory limitations on their ability to pay us dividends. Any reduction or limitation on our subsidiaries abilities to pay us dividends could have a material adverse effect on our liquidity and in particular, affect our ability to repay our borrowings.

        Any decline in available funding, including a decrease in brokered deposits, could adversely impact our ability to continue to implement our strategic plan, including our ability to originate loans, fund warehouse financing commitments, meet our expenses, declare and pay dividends to our shareholders or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

If we violate HUD lending requirements, our multi-family FHA origination business could be adversely affected.

        We originate, sell and service loans under the U.S. Department of Housing and Urban Development ("HUD") programs, and make certifications regarding compliance with applicable requirements and guidelines. If we were to violate these requirements and guidelines, or other applicable laws, or if the FHA loans we originate show a high frequency of loan defaults, we could be subject to monetary penalties and indemnification claims, and could be declared ineligible for FHA programs. Any inability to engage in our multi-family FHA origination and servicing business would lead to a decrease in our net income.

If the federal government shuts down or otherwise fails to fully fund the federal budget, our multi-family FHA origination business could be adversely affected.

        Disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time in recent years. Federal governmental entities, such as HUD, that rely on funding from the federal budget, could be adversely affected in the event of a government shut-down, which could have a material adverse effect on our multi-family FHA origination business and our results of operations.

A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects.

        Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly Indiana. If the national, regional and local economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability could be constrained. Additionally, our ability to assess the credit worthiness of our customers is made more complex by uncertain business and economic conditions. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, increases in non-performing assets and foreclosures, lower home sales and commercial activity, and fluctuations in the multi-family FHA financing sector. All of these factors are generally detrimental to our business. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its

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agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects.

If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which could require increases in our provision for loan losses.

        There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting, credit monitoring, and risk management procedures will adequately reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income, return on equity and capital to decrease.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.

        Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or other real estate owned, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and other real estate owned also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

        As of June 30, 2017, our nonperforming loans (which consist of nonaccrual loans and loans past due 90 days or more and still accruing interest) totaled $3.2 million, or 0.3% of our loan portfolio, and our nonperforming assets (which include only nonperforming loans at June 30, 2017) totaled $3.2 million, or 0.1% of total assets. In addition, we had $4.6 million in accruing loans that were 31-89 days delinquent as of June 30, 2017.

Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

        We establish our allowance for loan losses and maintain it at a level that management considers adequate to absorb probable loan losses based on an analysis of our portfolio, the underlying health of our borrowers and general economic conditions. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas. The determination of the appropriate level of the allowance

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for loan losses is inherently subjective and requires us to make significant estimates and assumptions regarding current credit risks and future trends, all of which may undergo material changes. The actual amount of loan losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.

        As of June 30, 2017, our allowance for loan losses as a percentage of total loans was 0.64% and as a percentage of total nonperforming loans was 213.3%. Although management believes that the allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management's decision to do so or because our banking regulators require us to do so. Our bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.

The small to midsized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair a borrower's ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition.

        We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to midsized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower's ability to repay a loan. In addition, the success of a small or medium-sized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate and small to medium-sized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be adversely affected.

Real estate construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

        Real estate construction loans comprised approximately 7.6% of our total loan portfolio as of June 30, 2017, and such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

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Our risk management framework may not be effective in mitigating risks and/or losses to us.

        Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

We are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects.

        Our success is dependent, to a large degree, upon the continued service and skills of our executive management team, particularly Mr. Petrie, our Chairman and Chief Executive Officer, and Mr. Dunlap, the President and Co-Chief Operating Officer of Merchants Bank.

        Our business and growth strategies are built primarily upon our ability to retain employees with experience and business relationships within their respective market areas. We seek to manage the continuity of our executive management team through regular succession planning. As part of such succession planning, other executives and high performing individuals have been identified and are provided certain training in order to be prepared to assume particular management roles and responsibilities in the event of the departure of a member of our executive management team. However, the loss of Mr. Petrie or Mr. Dunlap, or any of our other key personnel could have an adverse impact on our business and growth because of their skills, years of industry experience, and knowledge of our market areas, our failure to develop and implement a viable succession plan, the difficulty of finding qualified replacement personnel, or any difficulties associated with transitioning of responsibilities to any new members of the executive management team. With the exception of Mr. Dury, Executive Vice President and Chief Operating Officer of P/RMIC, who is subject to an "at will" employment agreement that contains a 12 month non-competition period, we do not have employment or non-competition agreements with our executives or other employees who are important to our business. While our mortgage originators and loan officers are generally subject to non-solicitation provisions as part of their employment, our ability to enforce such agreements may not fully mitigate the injury to our business from the breach of such agreements, as such employees could leave us and immediately begin soliciting our customers. The departure of any of our personnel who are not subject to enforceable non-competition agreements could have a material adverse impact on our business, results of operations and growth prospects.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

        The computer systems and network infrastructure we use could be vulnerable to hardware and cyber security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from physical break-ins, cyber security breaches and other disruptive problems caused by the internet or other users. Such computer break-ins and other disruptions would jeopardize the

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security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers. We regularly add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cyber security breaches, including firewalls and penetration testing. However, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminal intent on committing cyber-crime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and cloud vendors could prove inadequate. A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations, as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage, any of which could have an adverse effect on our business, financial condition and results of operations.

Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.

        We depend to a significant extent on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting and other internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace them, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology.

        The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

        Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

        Employee errors and employee and/or customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation or financial performance. Misconduct by our employees could include, but is not limited to, hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not

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always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

        We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to overcome the integration and other risks associated with acquisitions, which could have an adverse effect on our ability to implement our business strategy.

        Although we plan to continue to grow our business organically, we also intend to pursue acquisition opportunities that we believe complement our activities and have the ability to enhance our profitability and provide attractive risk-adjusted returns, including our pending acquisition of Joy State Bank. Our future acquisition activities could be material to our business and involve a number of risks, including the following:

    intense competition from other banking organizations and other acquirers for potential merger candidates;

    market pricing for desirable acquisitions resulting in returns that are less attractive than we have traditionally sought to achieve;

    incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;

    using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

    potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including consumer compliance issues;

    the time and expense required to integrate the operations and personnel of the combined businesses;

    experiencing higher operating expenses relative to operating income from the new operations;

    losing key employees and customers;

    reputational issues if the target's management does not align with our culture and values;

    significant problems relating to the conversion of the financial and customer data of the target;

    integration of acquired customers into our financial and customer product systems;

    risks of impairment to goodwill; or

    regulatory timeframes for review of applications may limit the number and frequency of transactions we may be able to consummate.

        Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval. Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy, which, in turn, could have an adverse effect on our business, financial condition and results of operations.

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If the goodwill that we have recorded or may record in connection with a business acquisition becomes impaired, it could require charges to earnings.

        Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired.

        Our goodwill impairment test involves a two-step process. Under the first step, the estimation of fair value of the reporting unit is compared to its carrying value including goodwill. If step one indicates a potential impairment, the second step is performed to measure the amount of impairment, if any. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of June 30, 2017, our goodwill totaled $523,000. While we have not recorded any impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of our existing goodwill or goodwill we may acquire in the future will not result in findings of impairment and related write-downs, which could adversely affect our business, financial condition and results of operations.

We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

        We face significant capital and other regulatory requirements as a financial institution. Although management believes that funds raised in this offering will be sufficient to fund operations and growth initiatives for at least the next 18 to 24 months based on our estimated future operations, we may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. In addition, we, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our stock.

        We are a community bank and known nationally for P/RMIC and warehouse financing, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our stock may be materially adversely affected.

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We face strong competition from financial services companies and other companies that offer banking, mortgage, leasing, and providers of FHA financing and servicing, which could harm our business.

        The banking business is highly competitive, and we experience competition in our market from many other financial institutions. Our operations consist of offering banking and residential mortgage services, and we also offer multi-family FHA financing to generate noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from online businesses with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers' fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking and mortgage customers, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.

        Many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, some of our current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than we may be able to accommodate. Our inability to compete successfully in the markets in which we operate could have an adverse effect on our business, financial condition or results of operations.

Changes in accounting standards could materially impact our financial statements.

        From time to time, the Financial Accounting Standards Board or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements. Additionally, as an emerging growth company we intend to take advantage of extended transition periods for complying with new or revised accounting standards affecting public companies.

The obligations associated with being a public company will require significant resources and management attention, which may divert from our business operations.

        As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition with the SEC. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur. We anticipate that these costs will materially increase our general and administrative expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management's attention from

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implementing our strategic plan, which could prevent us from successfully implementing our growth initiatives and improving our business, results of operations and financial condition.

        As an emerging growth company, we intend to take advantage of certain temporary exemptions from various reporting requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and an exemption from the requirement to obtain an attestation from our auditors on management's assessment of our internal control over financial reporting. When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

We depend on the accuracy and completeness of information provided by customers and counterparties.

        In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our customers' representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants' reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.

The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.

        The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this prospectus, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider "critical" because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our needing to revise or restate prior period financial statements, cause damage to our reputation and the price of our common stock, and adversely affect our business, financial condition and results of operations.

If we breach any of the representations or warranties we make to a purchaser of our mortgage loans, we may be liable to the purchaser for certain costs and damages.

        When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Under these agreements, we may be required to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected.

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We are dependent on the use of data and modeling in our management's decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.

        The use of statistical and quantitative models and other quantitative analyses is endemic to bank decision-making, and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing, interest rate sensitivity analysis, and the identification of possible violations of anti-money laundering regulations are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance. While we are not currently subject to annual Dodd-Frank Act stress testing (DFAST) and the Comprehensive Capital Analysis and Review (CCAR) submissions, we anticipate that model-derived testing may become more extensively implemented by regulators in the future. We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements are able to be employed more widely and in differing applications. While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact our decision-making ability or, if we become subject to regulatory stress-testing in the future, adverse regulatory scrutiny. Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making.

Downgrades to the credit rating of the U.S. government or of its securities or any of its agencies by one or more of the credit ratings agencies could have a material adverse effect on general economic conditions, as well as our business.

        On August 5, 2011, Standard & Poor's cut the credit rating of the U.S. federal government's long-term sovereign debt from AAA to AA+, while also keeping its outlook negative. Moody's had lowered its own outlook for the same debt to "Negative" on August 2, 2011, and Fitch also lowered its outlook for the same debt to "Negative," on November 28, 2011. In 2013, both Moody's and Standard & Poor's revised their outlooks from "Negative" to "Stable," and on March 21, 2014, Fitch revised its outlook from "Negative" to "Stable." Further downgrades of the U.S. federal government's sovereign credit rating, and the perceived creditworthiness of U.S. government-backed obligations, could affect our ability to obtain funding that is collateralized by affected instruments and our ability to access capital markets on favorable terms. Such downgrades could also affect the pricing of funding, when funding is available. A downgrade of the credit rating of the U.S. government, or of its agencies, government-sponsored enterprises or related institutions or instrumentalities, may also adversely affect the market value of such instruments and, further, exacerbate the other risks to which we are subject and any related adverse effects on our business, financial condition or results of operations.

Severe weather, natural disasters, pandemics, acts of war or terrorism or other external events could significantly impact our business.

        Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition or results of operations.

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Risks Related to the Regulation of Our Industry

Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.

        The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for the Federal Deposit Insurance Corporation ("FDIC") insurance assessments to a bank's average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC's authority to raise insurance premiums. The Dodd-Frank Act established the Consumer Financial Protection Bureau ("CFPB") as an independent entity within the Board of Governors of the Federal Reserve System ("Federal Reserve"), which has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower's ability to repay and prepayment penalties. Although the applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in assets, there can be no guarantee that such applicability will not be extended in the future or that regulators or other third parties will not seek to impose such requirements on institutions with less than $10 billion in assets, such as the Bank.

        Compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

        In addition, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.

        New regulations, increased regulatory reviews, and/or changes in the structure of the secondary mortgage markets which we would utilize to sell mortgage loans may be introduced and may increase costs and make it more difficult to operate a residential and multi-family mortgage origination and servicing business.

As a result of the Dodd-Frank Act and recent rulemaking, we are subject to more stringent capital requirements.

        In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms, or Basel III, and issued rules effecting certain changes required by the Dodd-Frank Act. Basel III is applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than "small bank holding companies" (generally bank holding companies with consolidated assets of less than $1.0 billion). Basel III not only increases most of the required minimum regulatory capital ratios, it introduces a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. Basel III also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital. In order to be a

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"well-capitalized" depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. The Basel III capital rules became effective as applied to us and the Bank on January 1, 2015 with a phase-in period that generally extends through January 1, 2019 for many of the changes.

        The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

        In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks' reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

        The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.

        The Federal Reserve, FDIC, Indiana Department of Financial Institutions ("IDFI"), Fannie Mae, Freddie Mac, the Rural Housing Service ("RHS"), and Ginnie Mae periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.

We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

        The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies, and other federal agencies are responsible for enforcing these laws

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and regulations. A challenge to an institution's compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also challenge an institution's performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

        Additionally, the CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are "unfair, deceptive, or abusive" in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The ongoing broad rulemaking powers of the CFPB have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services. The CFPB has indicated that it may propose new rules on overdrafts and other consumer financial products or services, which could have an adverse effect on our business, financial condition and results of operations if any such rules limit our ability to provide such financial products or services.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

        The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans.

        Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The Federal Reserve may require us to commit capital resources to support the Bank.

        As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the Federal Reserve's policy on serving as a source of financial strength. Under the "source of strength" doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal

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bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution's general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by us to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

We may be adversely affected by the soundness of other financial institutions.

        Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Additionally, if our competitors were extending credit on terms we found to pose excessive risks, or at interest rates which we believed did not warrant the credit exposure, we may not be able to maintain our business volume and could experience deteriorating financial performance.

Risks Related to this Offering and an Investment in Our Common Stock

An active, liquid trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the public offering price, or at all.

        Prior to this offering, there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration in an acquisition.

The price of our common stock could be volatile following this offering.

        The market price of our common stock following this offering may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things:

    actual or anticipated variations in our quarterly results of operations;

    changes in business and economic conditions;

    recommendations by securities analysts;

    operating and stock price performance of other companies that investors deem comparable to us;

    news reports relating to trends, concerns and other issues in the financial services industry generally;

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    perceptions in the marketplace regarding us and/or our competitors;

    additions or departures of key personnel;

    new technology used, or services offered, by competitors; and

    changes in government regulations.

        In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

Two of our directors and executive officers, Messrs. Petrie and Rogers, and their families beneficially own over        % of our outstanding shares of common stock following this offering which allows them to exert control over matters requiring shareholder approval.

        Prior to this offering, two of our directors and executive officers, Messrs. Petrie and Rogers and their families, collectively owned approximately 93% of our outstanding common stock as of August 31, 2017, and, upon the closing of this offering, they will hold approximately            % of our outstanding common stock. Therefore, even after this offering, Messrs. Petrie and Rogers, together with their families, will have the ability to control the outcome of matters submitted to our shareholders for approval, including the election or removal of directors, the amendment of our articles of incorporation, along with significant transactions. This control position may conflict with the interests of some or all of our other shareholders.

        We are not considered a "controlled company" within the meaning of the corporate governance standards of Nasdaq. Messrs. Petrie and Rogers and their families comprise two separate "groups" under SEC beneficial ownership rules with one group representing the Petrie family interests and the other group representing the Rogers family interests. Each of these groups controls less than 50% of our voting power. Therefore, we do not expect to be able to utilize the "controlled company" exemption. However, if Messrs. Petrie and Rogers were to form a single "group" with combined voting power exceeding 50%, we would become a "controlled company" and would be able to avail ourselves of the exemptions to Nasdaq's requirement to have a majority of independent directors and independent compensation and nomination committees. We currently have no intention to utilize the "controlled company" exemptions even if they are available in the future.

An investment in our common stock is not an insured deposit.

        An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

If equity research analysts do not publish research or reports about our business, or if they do publish such reports but issue unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline.

        The trading market for our common stock could be affected by whether equity research analysts publish research or reports about us and our business. We cannot predict at this time whether any research analysts will publish research and reports on us and our common stock. If one or more equity analysts do cover us and our common stock and publish research reports about us, the price of our

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stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

        If any of the analysts who elect to cover us downgrades our stock, our stock price could decline rapidly. If any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

We may not pay a dividend.

        Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, payment of dividends on our preferred stock, and other factors, we have made, and will continue to make, capital management decisions and policies could adversely impact the amount of dividends paid to our common shareholders.

        We are a separate and distinct legal entity from our subsidiaries, including Merchants Bank. We receive substantially all of our revenue from dividends from the Bank, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount of dividends that Merchants Bank and our indirect non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If Merchants Bank does not receive regulatory approval or if our subsidiaries' earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition or results of operations could be materially and adversely impacted.

Shares of certain shareholders may be sold into the public market in the near future. This could cause the market price of our common stock to drop significantly.

        In connection with this offering, our directors, our executive officers and certain of our shareholders have entered into lock-up agreements that restrict the sale of their holdings of our common stock for a period of 180 days from the date of this prospectus. The underwriters, in their discretion, may release any of the shares of our common stock subject to these lock-up agreements at any time without notice. In addition, after this offering, approximately            shares of our common stock that are currently issued and outstanding will not be subject to lock-up. The resale of such shares could cause the market price of our stock to drop significantly, and concerns that those sales may occur could cause the trading price of our common stock to decrease or to be lower than it might otherwise be.

        Immediately following this offering, we intend to file a registration statement on Form S-8 registering under the Securities Act of 1933, as amended (the "Securities Act"), the shares of common stock reserved for issuance in respect of incentive awards issued under our 2017 Equity Incentive Plan. If a large number of shares are sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital.

Our management will have broad discretion as to the use of proceeds from this offering, and we may not use the proceeds effectively.

        We are not required to apply any portion of the net proceeds of this offering for any particular purpose. Accordingly, our management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those contemplated at the time of this offering. A portion of the proceeds are expected to be used to provide additional capital as a cushion against minimum regulatory capital requirements, which may tend to reduce our return on equity compared to if such proceeds were used for further growth. Our shareholders may not agree

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with the manner in which our management chooses to allocate and invest the net proceeds. We may not be successful in using the net proceeds from this offering to increase our profitability or market value and we cannot predict whether the proceeds will be invested to yield a favorable return.

Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business and stock price.

        As a private company, we are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company after completion of this offering, we will be required to comply with the SEC's rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. In particular, we will be required to certify our compliance with Section 404 of the Sarbanes-Oxley Act beginning with our second annual report on Form 10-K, which will require us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. Furthermore, unless we remain an emerging growth company and elect additional transitional relief available to emerging growth companies, or we qualify as a smaller reporting company under applicable SEC rules, then our independent registered public accounting firm will be required to report on the effectiveness of our internal control over financial reporting, beginning as of that second annual report.

        If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging growth company, investors, counterparties and customers may lose confidence in the accuracy and completeness of our financial statements and reports; our liquidity, access to capital markets and perceptions of our creditworthiness could be adversely affected; and the market price of our common stock could decline. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, Federal Reserve, FDIC, IDFI or other regulatory authorities, which could require additional financial and management resources. These events could have an adverse effect on our business, financial condition and results of operations.

You will incur immediate dilution as a result of this offering.

        The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $            per share, based on the assumed initial public offering price of $            (the mid-point of the price range set forth on the cover page of this prospectus). Further, investors purchasing common stock in this offering will contribute approximately        % of the total amount invested by stockholders since our inception, but will own only approximately        % of the shares of common stock outstanding after giving effect to this offering. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see "Dilution."

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Future equity issuances could result in dilution, which could cause our common stock price to decline.

        We are generally not restricted from issuing additional shares of our common stock, up to the 50,000,000 shares of common stock and 5,000,000 shares of preferred stock authorized in our articles of incorporation, which in each case could be increased by a vote of a majority of our shares. We may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

        Although there are 41,625 shares of our 8% Non-Cumulative, Perpetual Preferred Stock issued and outstanding as of June 30, 2017, our articles of organization authorize us to issue up to 5,000,000 shares of one or more series of preferred stock. The board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.

Provisions in our charter documents and Indiana law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.

        Provisions of our charter documents and the Indiana Business Corporation Law (the "IBCL"), could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be "acting in concert" from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. Moreover, the combination of these provisions effectively inhibits certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements which reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "goal," "target," "outlook," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

        A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in "Risk Factors" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" or the following:

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

    our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;

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

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

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

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

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

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

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

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

    incremental costs and obligations associated with operating as a public company;

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

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

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    changes in federal tax law or policy; and

    risks related to this offering.

        The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this prospectus. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

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USE OF PROCEEDS

        Assuming an initial public offering price of $            per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus, the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $             million (or approximately $             million if the underwriters exercise their option to purchase additional shares from us in full).

        Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $             million, (or $             million if the underwriters elect to exercise in full their option to purchase additional shares), assuming the number of shares we sell, as set forth on the cover of this prospectus, remains the same, after deducting the underwriting discounts and estimated offering expenses.

        We intend to contribute $             million of the net proceeds that we receive from this offering to Merchants Bank to support balance sheet growth, and to use the remainder for general corporate purposes, which could include future acquisitions and other growth initiatives. We also intend to use approximately $5.8 million to complete the pending acquisition of Joy State Bank. See "Business—Pending Acquisition." We do not have any current specific plan for such remaining net proceeds, and do not have any current plans, arrangements or understandings to make any material acquisitions or to establish any de novo bank branches. Our management will retain broad discretion to allocate the net proceeds of this offering. The precise amounts and timing of our use of the proceeds will depend upon market conditions, among other factors.

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DIVIDEND POLICY

        It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally maintain our current dividend levels. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, payment of dividends on our preferred stock, contractual restrictions and any other factors that our board of directors may deem relevant.

        The following table shows recent quarterly dividends on our common stock during the periods indicated, as adjusted for stock splits.

Quarterly Period
  Amount
Per Share
  Payment Date

Second Quarter 2017

  $ 0.05   June 30, 2017

First Quarter 2017

    0.05   March 31, 2017

Fourth Quarter 2016

    0.05   December 31, 2016

Third Quarter 2016

    0.05   September 30, 2016

Second Quarter 2016

    0.05   June 30, 2016

First Quarter 2016

    0.05   March 31, 2016

Fourth Quarter 2015

    0.05   December 31, 2015

Third Quarter 2015

    0.05   September 30, 2015

Second Quarter 2015

    0.05   June 30, 2015

First Quarter 2015

    0.05   March 31, 2015

Dividend Restrictions

        Under the terms of our 8% Non-Cumulative, Perpetual Preferred Stock, we are not permitted to declare or pay any dividends on our common stock unless the dividends have been declared and paid on the shares of our 8% Non-Cumulative, Perpetual Preferred Stock for the period since the last payment of dividends. See "Description of Capital Stock—Preferred Stock—Dividends and Other Distributions."

        As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to pay dividends in the future, if any, and to make other payments. Merchants Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us. See "Supervision and Regulation—Merchants Bank—Dividends."

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CAPITALIZATION

        The following table shows our capitalization and regulatory capital ratios as of June 30, 2017, on an actual basis and on an as adjusted basis after giving effect to the net proceeds from the sale by us of            shares of our common stock at an assumed public offering price of $            per share, which is the midpoint of the price range on the cover of this prospectus, after deducting underwriting discounts and estimated offering expenses. You should read the following table in conjunction with the sections titled "Summary Historical Consolidated Financial Data," "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and related notes appearing elsewhere in this prospectus. This table assumes the underwriters do not exercise their option to purchase additional shares from us.

 
  As of June 30, 2017  
 
  Actual   As adjusted(1)  
(Dollars in thousands)
  (unaudited)
 

Shareholders' equity:

             

Preferred stock, no par value, $1,000.00 per share, 5,000,000 shares authorized, 41,625 shares of 8% Non-Cumulative, Perpetual Preferred Stock outstanding actual and            shares of 8% Non-Cumulative, Perpetual Preferred Stock outstanding as adjusted

  $ 41,581   $ 41,581  

Common stock, no par value, $0.01 per share, 50,000,000 shares authorized, 21,114,400 shares outstanding actual and            shares outstanding as adjusted

    20,103        

Retained earnings

    165,386     165,386  

Accumulated other comprehensive loss

    (557 )   (557 )

Total shareholders' equity

    226,513        

Total capitalization

  $ 226,513   $    

Capital ratios (Merchants Bancorp):

             

Tier 1 capital to average assets

    7.4 %     %

Common equity Tier 1 capital(2)

    7.4 %     %

Tier 1 capital to risk-weighted assets

    9.3 %     %

Total capital to risk-weighted assets

    9.6 %     %

Tangible common equity to tangible assets(3)

    6.0 %      

Capital ratios (Merchants Bank only):

   
 
   
 
 

Tier 1 common equity to risk-weighted assets

    11.7 %     %

Tier 1 leverage ratio

    9.3 %     %

Tier 1 capital to risk-weighted assets

    11.7 %     %

Total capital to risk-weighted assets

    12.0 %     %

(1)
Each $1.00 increase or (decrease) in the assumed initial public offering price of $            per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or (decrease), respectively, the amount of cash and cash equivalents, total stockholders' equity and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

(2)
Deductions and other adjustments to the capital measure "Common Equity Tier 1" are being phased in over a four-year period, and began as of January 1, 2016 at the 0.625% level with increases at that amount each subsequent January 1 until it reaches 2.5% on January 1, 2019.

(3)
Tangible common equity to tangible assets is a non-GAAP financial measure. For more information on this financial measure, see "Non-GAAP Financial Measures" for a reconciliation of this measure to its most comparable GAAP measure.

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DILUTION

        If you purchase shares of our common stock in this offering, your ownership interest will experience immediate book value dilution to the extent the public offering price per share exceeds our net tangible book value per share immediately after this offering. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities and preferred stock, divided by the number of shares of common stock outstanding.

        Our net tangible book value at June 30, 2017 was approximately $184.4 million, or $8.73 per share. After giving effect to our sale of            shares in this offering at an assumed public offering price of $            per share, which is the midpoint of the price range on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses, our as adjusted net tangible book value at June 30, 2017 would have been approximately $             million, or $            per share. Therefore, this offering will result in an immediate increase of $            in the net tangible book value per share to our existing shareholders, and immediate dilution of $            in the net tangible book value per share to investors purchasing shares in this offering. The following table illustrates this per share dilution.

Assumed initial public offering price per share, the mid-point of the price range set forth on the cover page of this prospectus

        $           

Net tangible book value per share at June 30, 2017

  $ 8.73               

Increase in net tangible book value per share attributable to this offering

             

As adjusted net tangible book value per share after this offering

             

Dilution in net tangible book value per share to new investors

        $           

        A $1.00 increase (decrease) in the assumed public offering price of $            per share, which is the midpoint of the price range on the cover of this prospectus, would increase (decrease) our net tangible book value by $             million, or $            per share, and the dilution to new investors by $            per share, assuming no change to the number of shares offered by us as set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses.

        If the underwriters exercise their option to purchase additional shares from us in full, the as adjusted net tangible book value after giving effect to this offering would be $            per share. This represents an increase in net tangible book value of $            per share to existing shareholders and dilution of $            per share to new investors.

        The following table sets forth information regarding the shares issued to, and consideration paid by, our existing shareholders and the shares to be issued to, and consideration to be paid by, investors in this offering at an assumed public offering price of $            per share, which is the midpoint of the price range on the cover of this prospectus, before deducting underwriting discounts and estimated offering expenses.

 
   
   
  Total consideration    
 
 
  Shares purchased    
 
 
  Amount
(in thousands)
   
  Average price
per share
 
 
  Number   Percent   Percent  

Shareholders as of June 30, 2017

                   % $                % $           

Investors in this offering

                   %                  %             

Total

                 100.0 % $              100.0 % $           

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        The number of shares of our common stock to be outstanding after this offering is based on 21,497,667 shares of common stock outstanding as of August 31, 2017, as adjusted for the 2.5 for 1 stock split that was effective July 6, 2017:

    excludes 17,910 shares of unvested restricted stock (as adjusted for the 2.5 for 1 stock split that was effective on July 6, 2017); and

    excludes 1,500,000 shares of common stock available for future awards under our 2017 Equity Incentive Plan.

        We may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.


PRICE RANGE OF OUR COMMON STOCK

        Prior to this offering, our common stock has not been traded on an established public trading market, and quotations for our common stock were not reported on any market. As a result, there has been no regular market for our common stock. Although shares of our common stock may have been sporadically traded in private transactions, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in an active market. As of June 30, 2017, there were 102 holders of record of our common stock.

        We anticipate that this offering and the listing of our common stock on the Nasdaq Capital Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See the section of this prospectus titled "Underwriting" for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

        The following table sets forth our summary historical consolidated financial data as of the dates and for the periods shown. The summary balance sheet data as of December 31, 2016 and 2015 and the summary income statement data for the years ended December 31, 2016 and 2015 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary historical consolidated financial data as of and for the years ended December 31, 2014, 2013 and 2012 from our audited financial statements not included in this prospectus. The summary consolidated financial data as of June 30, 2017 and for the six months ended June 30, 2017 and 2016 is derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus and includes all normal and recurring adjustments that we consider necessary for a fair presentation. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

        You should read the following financial data in conjunction with the other information contained in this prospectus, including "Summary Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes included elsewhere in this prospectus.

 
  At or for the Six Months
Ended June 30,
  At or for the Year Ended December 31,  
(Dollars in thousands, except per share data)
  2017   2016   2016   2015   2014   2013   2012  
 
  (unaudited)
   
   
   
   
   
 

Balance Sheet Data

                                           

Total Assets

  $ 3,091,500   $ 2,506,974   $ 2,718,512   $ 2,269,442   $ 1,793,008   $ 1,179,791   $ 936,172  

Loans held for investment

    1,070,866     872,292     941,796     762,212     447,614     266,092     217,073  

Allowance for loan losses

    (6,865 )   (5,902 )   (6,250 )   (5,422 )   (4,458 )   (3,295 )   (2,854 )

Loans held for sale

    983,420     818,404     764,503     620,583     736,667     542,571     365,444  

Investment securities

    523,351     426,310     463,549     362,325     305,583     222,798     190,261  

Deposits

    2,771,501     2,247,621     2,428,621     2,039,520     1,610,719     1,054,304     815,418  

FHLB advances and other borrowings

    26,633     27,030     27,006     27,490     17,860     3,223     7,584  

Subordinated debt

    30,000     30,000     30,000     30,000     30,000          

Total liabilities

    2,864,987     2,329,701     2,512,224     2,121,242     1,682,872     1,060,976     841,864  

Preferred stock

    41,581     28,525     41,581     10,000              

Common stock

    20,103     20,062     20,061     20,061     16,121     9,469     9,469  

Total shareholder's equity

    226,513     177,273     206,288     148,200     110,137     118,814     94,308  

Tangible common equity

    184,409     148,226     164,184     137,677     109,614     118,291     93,785  

Income Statement Data

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Interest Income

  $ 41,471   $ 32,421   $ 72,939   $ 56,345   $ 39,554   $ 31,659   $ 25,764  

Interest Expense

    12,216     8,602     18,968     14,290     8,924     5,951     5,054  

Net interest income

    29,255     23,819     53,971     42,055     30,630     25,708     20,710  

Provision for loan losses

    480     480     960     960     1,215     720     1,270  

Noninterest income

    24,717     9,951     28,504     27,008     20,263     27,284     36,121  

Noninterest expense

    14,902     12,163     26,720     20,922     15,796     13,328     12,504  

Income before taxes

    38,590     21,127     54,795     47,181     33,882     38,944     43,057  

Provision for income taxes

    14,702     8,353     21,668     18,798     30,079          

Net income, as previously reported

    23,888     12,774     33,127     28,383     3,803     38,944     43,057  

Non-GAAP Reconciliation:

                                           

Pro-forma adjustments:

                                           

Add back of tax effect of S Corp to C Corp conversion

                    16,431 (1)        

Less provision for income taxes

                        15,578 (2)   17,223 (2)

Pro-forma net income

    23,888     12,774     33,127     28,383     20,234     23,366     25,834  

Preferred stock dividends

    1,665     407     2,002                  

Pro-forma net income available to common shareholders

  $ 22,223   $ 12,367   $ 31,125   $ 28,383   $ 20,234   $ 23,366   $ 25,834  

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  At or for the Six Months
Ended June 30,
  At or for the Year Ended December 31,  
(Dollars in thousands, except per share data)
  2017   2016   2016   2015   2014   2013   2012  
 
  (unaudited)
   
   
   
   
   
 

Credit Quality Data

                                           

Loans 30-89 days past due

  $ 4,617   $ 382   $ 2,288   $ 1,515   $ 1,190   $   $ 148  

Loans 30-89 days past due to total loans

    0.43 %   0.04 %   0.24 %   0.20 %   0.27 %       0.07 %

Nonperforming loans

  $ 3,219   $ 2,195   $ 1,887   $ 887   $ 815   $ 490   $ 1,451  

Nonperforming loans to total loans

    0.30 %   0.25 %   0.20 %   0.12 %   0.18 %   0.18 %   0.67 %

Nonperforming assets

  $ 3,219   $ 2,195   $ 1,887   $ 887   $ 815   $ 490   $ 1,451  

Nonperforming assets to total assets

    0.10 %   0.09 %   0.07 %   0.04 %   0.05 %   0.04 %   0.16 %

Allowance for loan losses to total loans

    0.64 %   0.68 %   0.66 %   0.71 %   1.00 %   1.24 %   1.31 %

Allowance for loan losses to nonperforming loans

    213.26 %   268.88 %   331.21 %   611.27 %   546.99 %   672.45 %   196.69 %

Net charge-offs/(recoveries) to average loans

    (0.01 )%               0.02 %   0.12 %   0.14 %

Per Share Data (Common Stock)

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Basic and diluted earnings per share

                                           

As reported

  $ 1.05   $ 0.59   $ 1.47   $ 1.35   $ 0.19   $ 1.95   $ 2.15  

Pro-forma

  $ 1.05   $ 0.59   $ 1.47   $ 1.35   $ 1.01 (3) $ 1.17 (3) $ 1.29 (3)

Dividends declared

  $ 0.10   $ 0.10   $ 0.20   $ 0.20   $ 0.95   $ 0.72   $ 0.44  

Book value

                                           

As reported

  $ 8.76   $ 7.05   $ 7.80   $ 6.55   $ 5.32   $ 5.94   $ 4.72  

Pro-forma

  $ 8.76   $ 7.05   $ 7.80   $ 6.55   $ 6.11 (4) $ 5.16 (5) $ 3.85 (5)

Tangible book value

                                           

As reported

  $ 8.73   $ 7.02   $ 7.78   $ 6.52   $ 5.29   $ 5.92   $ 4.69  

Pro-forma

  $ 8.73   $ 7.02   $ 7.78   $ 6.52   $ 6.09 (4) $ 5.14 (5) $ 3.83 (5)

Weighted average shares outstanding

                                           

Basic

    21,114,400     21,111,200     21,111,208     21,075,475     20,017,400     20,000,000     20,000,000  

Diluted

    21,119,411     21,112,283     21,113,435     21,075,475     20,017,400     20,000,000     20,000,000  

Shares outstanding at period end

    21,114,400     21,111,200     21,111,200     21,111,200     20,703,700     20,000,000     20,000,000  

Performance Metrics

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Return on average assets

                                           

As reported

    1.74 %   1.05 %   1.24 %   1.32 %   0.25 %   3.18 %   4.81 %

Pro-forma

    1.74 %   1.05 %   1.24 %   1.32 %   1.34 %(4)   1.91 %(5)   2.89 %(5)

Return on average equity

                                           

As reported

    22.00 %   16.52 %   18.68 %   22.62 %   3.71 %   37.07 %   57.86 %

Pro-forma

    22.00 %   16.52 %   18.68 %   22.62 %   19.76 %(4)   22.24 %(5)   34.71 %(5)

Return on average tangible common equity

                                           

As reported

    25.40 %   17.18 %   20.50 %   22.73 %   3.73 %   37.25 %   58.27 %

Pro-forma

    25.40 %   17.18 %   20.50 %   22.73 %   19.86 %(4)   22.35 %(5)   34.96 %(5)

Net interest margin

    2.23 %   2.03 %   2.07 %   2.02 %   2.12 %   2.19 %   2.41 %

Efficiency ratio

    27.61 %   36.02 %   32.40 %   30.29 %   31.04 %   25.15 %   22.00 %

Loans and loans held for sale to deposits

    74.12 %   75.22 %   70.26 %   67.80 %   73.52 %   76.70 %   71.44 %

Capital Ratios—Merchants Bancorp

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Tangible common equity to tangible assets

    6.0 %   5.9 %   6.0 %   6.1 %   6.1 %   10.0     10.0  

Common equity Tier 1 capital to risk-weighted assets

    7.4 %   7.4 %   8.1 %   8.5 %   N/ A   N/ A   N/ A

Tier 1 leverage ratio

    7.4 %   6.5 %   6.6 %   6.1 %   6.1 %   8.4 %   8.0 %

Tier 1 capital to risk weighted assets

    9.3 %   8.9 %   10.3 %   9.2 %   7.7 %   11.9 %   18.0 %

Total capital to risk-weighted assets

    9.6 %   9.2 %   10.6 %   9.6 %   8.1 %   12.2 %   18.0 %

Regulatory Capital Ratios—Merchants Bank Only

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Tier 1 common capital to risk-weighted assets

    11.7 %   12.0 %   13.2 %   12.9 %   N/ A        

Tier 1 leverage ratio

    9.3 %   8.7 %   8.4 %   8.5 %   8.7 %   8.4 %   8.0 %

Tier 1 capital to risk-weighted assets

    11.7 %   12.0 %   13.2 %   12.9 %   11.0 %   11.9 %   18.0 %

Total capital to risk-weighted assets

    12.0 %   12.4 %   13.5 %   13.3 %   11.3 %   12.2 %   18.0 %

(1)
Represents the recognition of deferred tax liabilities recorded upon conversion from a Subchapter S corporation to a regular C corporation.

(2)
Represents the pro-forma effects of income taxes using a 40% income tax rate, as we were a Subchapter S corporation in years prior to 2014.

(3)
Represents basic and diluted earnings per share calculated on pro-forma net income.

(4)
Represents pro-forma performance metrics calculated on net income as adjusted for the effects of the deferred tax liabilities recorded in connection with the conversion from Subchapter S to C corporation.

(5)
Represents pro-forma performance metrics calculated on net income as adjusted for the effects of income taxes included calculated using a 40% income tax rate for years previously reported as a Subchapter S corporation.

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NON-GAAP FINANCIAL MEASURES

        Some of the financial measures included in this prospectus are not measures of financial performance recognized by generally accepted accounting principles in the United States. Our management uses these non-GAAP financial measures in its analysis of our performance. These non-GAAP financial measures include presentation of tangible shareholders' equity and pro-forma tax effects related to our conversion from a Subchapter S corporation to a C corporation for income tax purposes.

        The reconciliation from shareholders' equity per GAAP to tangible shareholders' equity is comprised solely of goodwill totaling $523,000 in all periods from December 31, 2012 through June 30, 2017.

        We converted from a Subchapter S corporation to a C corporation in 2014. In connection with this conversion, we recorded a charge to net income in 2014 for the recognition of deferred tax liabilities totaling $16.4 million. To facilitate comparison of the years ended December 31, 2014, 2013 and 2012, with subsequent years, we have displayed tax expense for 2013 and 2012 at an estimated assumed tax rate of 40.0%, and a reversal of the charge for deferred tax liabilities in 2014.

        We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that the non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and these disclosures are not necessarily comparable to non-GAAP financial measures that other companies use.

        A reconciliation of GAAP to non-GAAP financial measures is as follows:

 
  At June 30,   At December 31,  
(Dollars in thousands)
  2017   2016   2016   2015   2014   2013   2012  
 
  (unaudited)
   
   
   
   
   
 

Tangible shareholders' equity

                                           

Shareholders' equity per GAAP

  $ 226,513   $ 177,273   $ 206,288   $ 148,200   $ 110,137   $ 118,814   $ 94,308  

Less: Goodwill

    (523 )   (523 )   (523 )   (523 )   (523 )   (523 )   (523 )

Tangible shareholders' equity

    225,990     176,750     205,765     147,677     109,614     118,291     93,785  

Less preferred stock

    (41,581 )   (28,525 )   (41,581 )   (10,000 )            

Tangible common shareholders' equity

  $ 184,409   $ 148,225   $ 164,184   $ 137,677   $ 109,614   $ 118,291   $ 93,785  

Tangible common equity to tangible assets(1)

    6.0 %   5.9 %   6.0 %   6.1 %   6.1 %   10.0 %   10.0 %

Efficiency ratio(2)

    27.61 %   36.02 %   32.40 %   30.29 %   31.04 %   25.15 %   22.00 %


 
  For the Six
Months Ended
June 30,
  For the Year Ended
December 31,
 
 
  2017   2016   2016   2015   2014   2013   2012  

Net income as reported

  $ 23,888   $ 12,774   $ 33,127   $ 28,383   $ 3,803   $ 38,944   $ 43,057  

Pro-forma tax effects of C corp status

                    16,431     (15,578 )   (17,223 )

Pro-forma net income

  $ 23,888   $ 12,774   $ 33,127   $ 28,383   $ 20,234   $ 23,366   $ 25,834  

(1)
Tangible assets represents consolidated assets less goodwill of $523 in each period.

(2)
The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Summary Historical Consolidated Financial Data" and "Selected Historical Consolidated Financial Data" and our audited and unaudited consolidated financial statements and the accompanying notes included elsewhere in this prospectus. 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 "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors" and elsewhere in this prospectus. We assume no obligation to update any of these forward-looking statements.

Our Company 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 multiple lines of business with a focus on 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.

        Our business consists primarily of funding low risk loans that sell within 90 days of origination. The sale of loans and servicing fees generated from the multifamily rental real estate loans servicing portfolio contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, and retail and commercial 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 serving to maximize net income and shareholder return.

Our Corporate Structure

        We have multiple lines of business and provide various banking and financial services through our subsidiaries and Merchants Bank divisions as follows:

    P/R Mortgage & Investment Corp. (a subsidiary of Merchants Bank)

    Multi-Family Rental Housing

    Healthcare Financing

    Servicing and Subservicing

    RICHMAC Funding, LLC (a subsidiary of P/RMIC)

    Multi-Family Rental Housing

    Merchants Bank of Indiana

    Warehouse Financing and Loan Participations

    Commercial Lending

    Retail Banking

    SBA Small Business Loan Programs

    Agricultural Lending

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    Merchants Mortgage

    Single-Family Mortgage Lending

    Correspondent Mortgage Banking

    Natty Mac Funding, Inc. (a subsidiary of Merchants Bank)

    Warehouse Financing and Loan Participations

P/RMIC: Multi-Family Rental Housing, Healthcare Financing and Servicing

        P/RMIC is 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.

        P/RMIC originated $1.2 billion in loans during 2016 and $906 million during the six months ended June 30, 2017. P/RMIC primarily originates FHA loans that are sold as Ginnie Mae mortgage backed securities in approximately 30 days. The loans are sold and the mortgage servicing rights are retained. Other originations include bridge and permanent financing that are referred to the Banking segment. These loans eventually become permanent FHA financings by P/RMIC. In addition to the $1.2 billion originated directly by P/RMIC, we also funded loans brought to us by non-affiliated entities. As of June 30, 2017, P/RMIC's servicing portfolio totaled $6.2 billion, which includes owned and subserviced loans.

        We generated approximately $22.6 and $23.0 million, or 41.9% and 27.9%, of net revenue (net interest income plus non-interest income) from our Multi-family Mortgage Banking segment for the six months ended June 30, 2017 and year ended December 31, 2016, respectively.

RICHMAC

        In August 2017, P/RMIC acquired RICHMAC Funding, LLC, a national multi-family housing mortgage lender, to complement and expand the products and services offered by P/RMIC.

MERCHANTS BANK: Warehouse Financing and Loan Participations

        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 in the country. For the six months ended June 30, 2017, Merchants Bank and NMF had $1.2 billion in loans outstanding from warehouse lines for credit to single and multi-family lenders and loan participations. We generated approximately $17.7 and $35.3 million, or 32.9% and 42.8%, of net revenue (net interest income plus non-interest income) from our Mortgage Warehousing segment for the six months ended June 30, 2017 and year ended December 31, 2016, respectively.

Commercial Lending and Retail Banking

        Merchants Bank operates under an Indiana charter and provides full banking services. Merchants Bank has five depository branches located in Carmel, Indianapolis and Lynn, Indiana. Merchants Bank holds loans in its portfolio comprised of multi-family construction and bridge loans referred by P/RMIC, 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.

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SBA Lending

        Merchants Bank participates in the SBA 7(a) program in order to meet the needs of our small business community, and help diversify our retail revenue stream. We originate and service, as well as sell the guaranteed portion of these loans. As of June 30, 2017, Merchants Bank had originated $4.5 million in SBA 7(a) loans in Marion and Hamilton counties in Central Indiana since our participation in this program.

        The SBA's 7(a) program provides up to a 75% guaranty for loans greater than $150,000. For loans $150,000 or less, the program provides up to an 85% guaranty. The maximum 7(a) loan amount is $5 million. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program. We typically sell in the secondary market the SBA-guaranteed portion (generally 75% of the principal balance) of the loans we originate.

Agricultural Lending

        Merchants Bank has its MBI-Lynn division located in Lynn, Randolph County, Indiana with its primary business function to provide agricultural loans within its designated CRA area of Randolph and Wayne counties in Eastern Indiana and nearby Darke County, Ohio. Merchants Bank offers operating lines of credit for crop and livestock production, intermediate term financing to purchase equipment and breeding livestock and long-term financing to purchase agricultural real estate. As of June 30, 2017, there were $66.4 million of agricultural loans in the portfolio, including undisbursed funds of $4.3 million, 48.2% of which have a FSA 90% guarantee. Merchants Bank is approved to sell agricultural loans in the secondary market through Farmer Mac and uses this relationship to manage interest rate risk within the agricultural loan portfolio. As of June 30, 2017, $13.5 million in agricultural loans had been sold to Farmer Mac without recourse. Merchants Bank has written off less than $25 thousand in loan loss in its agricultural loan portfolio since December 31, 2004.

Loan Origination Guidelines

        Our various categories of loans held for investment are underwritten in accordance with guidelines appropriate for each loan type. For mortgage warehouse lines of credit, we evaluate warehouse lending customers based on their financial condition, including minimum net worth and compliance with agency requirements, before entering a warehouse line of credit relationship. Warehouse lending customers are monitored quarterly and renewed annually. We review each mortgage loan funded on the lines of credit prior to funding to ensure compliance with agency or investor guidelines. Residential and multi-family rental real estate loans included in loans held for investment are underwritten in accordance with agency credit criteria. However, we make certain exceptions for loan size on certain residential mortgages. Commercial and commercial real estate loans are underwritten in accordance with loan policy parameters of 80% loan-to-value ratio and 1.25 debt service coverage ratio, and we may include other financial covenants and guarantors where we deem appropriate.

MERCHANTS MORTGAGE: Single Family Mortgage Lending, Correspondent Lending and Servicing

        Merchants Mortgage is the branded arm and division of Merchants Bank which is a full service single-family mortgage origination and servicing platform started in February 2013. Merchants Mortgage is both a retail and correspondent mortgage lender. Merchants Mortgage offers agency eligible, jumbo fixed and hybrid adjustable rate mortgages for purchase or refinancing. Other products include construction, bridge and lot financing and HELOCs, including the All-in-One product, which links a customer's checking account balance to a first lien HELOC. Merchants Mortgage generates revenues from fees charged to borrowers, interest income during the warehouse period, and gain on

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the sale of loans to investors. There are multiple investor outlets, including direct sale capability to Fannie Mae, Freddie Mac, FHLBI, and other third-party investors to allow Merchants Mortgage a best execution at sale. Merchants Mortgage also originates loans held for investment and earns interest income over the life of the loan.

NMF: Warehouse Financing and Loan Participations

        Through NMF we engage in loan participations and warehouse financing with Home Point and its subsidiaries and correspondent customers. NMF was established as a wholly owned subsidiary of Merchants Bank in 2014. 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.

MIDTOWN WEST

        MBI Midtown owns land upon which we expect to build our new corporate headquarters building in Carmel, Indiana.

ASH REALTY

        Ash Realty holds assets acquired through, or in lieu of, loan foreclosures. At June 30, 2017, there were no assets held in Ash Realty.

ARCLINE FINANCIAL, LLC

        Merchants owns 30% of Arcline and is accounted for using the equity method of accounting. Arcline processes warehouse and correspondent lending transactions, including on behalf of Merchants Bank.

Our Segments

        We operate in three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. We believe that P/RMIC, which operates in our Multi-Family Mortgage Banking segment, is one of the largest FHA lenders and Ginnie Mae servicers in the country based on aggregate loan principal value. P/RMIC has grown to over $1 billion in annual originations since the beginning of 2015 and services $6.2 billion as of June 30, 2017. The servicing portfolio is primarily Ginnie Mae and is a significant source of our noninterest income and deposits. Our Mortgage Warehousing segment funds agency eligible loans for non-depository financial institutions from the date of origination or purchase until the date of sale to an investor, which typically takes less than 30 days and is a significant source of our net interest income, loans, and deposits. Mortgage Warehousing has grown to fund over $20 billion of loan principal annually since 2015. Mortgage Warehousing also provides deposits related to the mortgage escrow accounts of its customers. The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Banking operates primarily in the Indianapolis metropolitan and Randolph County Indiana markets except for correspondent mortgage banking which, like Multi-family Mortgage Banking and Mortgage Warehousing, is a national business. The Banking segment has a well-diversified customer and borrower base and has experienced significant growth over the past three years. These segments diversify the net income of the Bank and provide synergies across the segments. The strategic opportunities include that P/RMIC loans are funded by the Banking segment and the Banking segment provides Ginnie Mae custodial services to P/RMIC. The securities available for sale funded by P/RMIC custodial deposits are pledged to FHLBI to provide advance capacity during periods of high residential loan volume for

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mortgage warehousing. Mortgage Warehousing provides leads to correspondent residential lending in the banking segment. Retail and commercial customers provide cross selling opportunities within the banking segment. These and other synergies form a part of our strategic plan.

        For the six months ended June 30, 2017 and 2016, we had total net income of $23.9 million and $12.8 million, respectively, and for the years ended December 31, 2016 and 2015, we had total net income of $33.1 million and $28.4 million, respectively. Net income for our three segments for the respective periods was as follows:

 
  Net Income
For the Six
Months Ended
June 30,
  For the Year Ended
December 31,
 
(Dollars in thousands)
  2017   2016   2016   2015  
 
  (unaudited)
   
   
 

Multi-family Mortgage Banking

  $ 11,300   $ 2,913   $ 9,408   $ 11,277  

Mortgage Warehousing

    8,418     7,005     16,839     13,693  

Banking

    5,454     4,303     9,492     5,270  

Other

    (1,284 )   (1,447 )   (2,612 )   (1,857 )

Total

  $ 23,888   $ 12,774   $ 33,127   $ 28,383  

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 and investment securities and dividends on FHLBI stock we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings. Since 2014, net interest income has been 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) the costs of our deposits and other funding sources; (c) our net interest margin; and (d) 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) mortgage warehouse fees; and (d) other noninterest income.

        Gain on sale of loans includes placement and origination fees, capitalized mortgage 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. Fair value adjustments to the value of mortgage servicing rights are also included in noninterest income. Mortgage warehouse fees are collected as the funded loans are sold in the secondary market.

        Noninterest expense.    Noninterest expense includes, among other things: (a) salaries and employee benefits; (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 compensation, employee benefits and employment tax expenses for our personnel. 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 our amount of custodial and brokered deposits as a percentage of total deposits, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without a material loss on the investment, the amount of cash and cash equivalent securities we hold, the repricing characteristics and maturities of our assets when compared to the repricing characteristics of our liabilities and 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 mortgage 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, beginning in 2014 we have annually increased our capital through net income less dividends and equity issuances.

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        Asset Quality.    We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of our allowance for loan losses, or the allowance, the diversification and quality of loan and investment portfolios, the extent of counterparty risks, credit risk concentrations and 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 agencies. Since the recession ended in 2009, Economic growth has been modest, the real estate market continues to recover and unemployment rates in the U.S. and our primary markets have significantly improved. In December 2015, the Federal Reserve raised short-term interest rates for the first time in nine years with a 25 basis point increase and then raised rates again in December 2016, March 2017 and June 2017, each with additional 25 basis point increases. The Mortgage Bankers Association reported a decrease in residential volume of 4.2% for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 and has forecasted a 14.0% decline in residential volume from $1.891 trillion in 2016 to $1.627 trillion in 2017. Forecasts for 2018 and 2019 are $1.588 and $1.640 trillion, respectively.

        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.

        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 will continue to grow, we expect the provision to increase irrespective of any increases of problem loans in our portfolio.

Comparison of Operating Results for the Six Months Ended June 30, 2017 and 2016

        General.    Net income for the six months ended June 30, 2017 was $23.9 million, an increase of $11.1 million, or 87.0%, over the net income of $12.8 million for the six months ended June 30, 2016. The increase was primarily due to a $5.4 million increase in net interest income and a $14.8 million increase in noninterest income, which were partially offset by a $2.7 million increase in non-interest expense and a $6.3 million increase in the provision for income taxes.

        Interest Income.    Interest income increased $9.1 million, or 27.9%, to $41.5 million for the six months ended June 30, 2017 from $32.4 million for the six months ended June 30, 2016. This increase

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was primarily attributable to a $6.7 million increase in interest on loans and loans held for sale, a $1.3 million increase in interest on trading securities, a $348,000 increase in interest on available-for-sale securities, and a $638,000 increase in interest on other interest-earning deposits, including FHLBI stock. The average balance of loans, including loans held for sale, during the six months ended June 30, 2017 increased $190.7 million, or 12.5%, to $1.7 billion from $1.5 billion for the six months ended June 30, 2016, while the average yield on loans increased 39 basis points to 4.08% for the six months ended June 30, 2017 compared to 3.69% for the six months ended June 30, 2016. The increase in loans and loans held for sale was due to the addition of Mortgage Warehousing segment customers resulting in warehouse fundings increasing 4.3% to $11.1 billion for the six months ended June 30, 2017 compared to $10.6 billion for the six months ended June 30, 2016. The increase in the average yield on loans was due to the overall increase in interest rates in the economy period to period. The average balance of trading securities increased $85.3 million, or 91.0%, to $179.1 million for the six months ended June 30, 2017 compared to $93.8 million for the six months ended June 30, 2016, while the average yield decreased four basis points to 3.18% for the six months ended June 30, 2017. The average balance of available-for-sale securities increased $61.6 million, or 21.6%, to $346.3 million for the six months ended June 30, 2017 compared to $284.8 million for the six months ended June 30, 2016, and the average yield increased one basis point to 1.12% for the six months ended June 30, 2017. The average balance of other interest-earning assets decreased $48.2 million, or 10.6%, to $405.2 million for the six months ended June 30, 2017 from $453.4 million for the six months ended June 30, 2016, while the average yield increased 39 basis points to 0.96% for the six months ended June 30, 2017.

        Interest Expense.    Total interest expense increased $3.6 million, or 42.0%, to $12.2 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Interest expense on deposits increased $3.6 million, or 71.6%, to $8.5 million for the six months ended June 30, 2017 from the six months ended June 30, 2016. The increase was primarily due to a 27 basis point increase in the average cost of interest-bearing deposits, to 0.92% for the six months ended June 30, 2017 from 0.65% for the same period in 2016, and an increase in the average balance of interest-bearing deposits of $323.1 million, or 20.9%, to $1.9 billion for the six months ended June 30, 2017. The increase was primarily due to the addition of deposits from existing Mortgage Warehousing segment customers. The increase in the cost of deposits was due to the overall increase in interest rates in the economy period to period. Interest expense on borrowings increased $63,000, or 1.7%, to $3.7 million for the six months ended June 30, 2017 from $3.6 million for the six months ended June 30, 2016. The increase was due primarily to a $2.2 million, or 3.7%, increase in the average balance outstanding period to period, which was partially offset by a 21 basis point decrease in the average cost of borrowings to 12.30% for the six months ended June 30, 2017 compared to 12.51% for the six months ended June 30, 2016. The terms of our $30.0 million subordinated debt include a variable interest rate equal to the one-month LIBOR rate plus an applicable margin. Additionally, the debt agreement provides for an additional interest payment of an amount equal to 49.0% of the earnings of our wholly owned subsidiary, NMF. As a result of this payment, the effective cost of borrowings increased from 3.46% and 3.13%, to 12.30% and 12.51% for the six months ended June 30, 2017 and 2016, respectively.

        Net Interest Income.    Net interest income increased $5.4 million, or 22.8%, to $29.3 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The increase was due to a 19 basis point increase in our interest rate spread, to 1.87%, for the six months ended June 30, 2017 from 1.68% for the six months ended June 30, 2016, which was partially offset by a $36.0 million decrease in our net interest earning assets period to period. Our net interest margin increased to 2.23% for the six months ended June 30, 2017 from 2.03% for the six months ended June 30, 2016.

        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;

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(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.

 
  Six Months Ended June 30,  
 
  2017   2016  
(Dollars in thousands)
  Average
Balance(1)
  Interest
Inc / Exp
  Average
Yield /
Rate
  Average
Balance(1)
  Interest
Inc / Exp
  Average
Yield /
Rate
 
 
  (unaudited)
 

ASSETS

                                     

Interest bearing deposits and other

  $ 405,188   $ 1,926     0.96 % $ 453,421   $ 1,288     0.57 %

Securities available for sale

    346,316     1,916     1.12 %   284,766     1,568     1.11 %

Trading securities

    179,058     2,824     3.18 %   93,753     1,499     3.22 %

Loans and loans held for sale

    1,720,849     34,805     4.08 %   1,530,163     28,066     3.69 %

Total interest-earning assets

    2,651,411     41,471     3.15 %   2,362,103     32,421     2.76 %

Allowance for loan losses

    (6,580 )               (5,684 )            

Noninterest-earning assets

    106,992                 76,271              

TOTAL ASSETS

  $ 2,751,823               $ 2,432,690              

LIABILITIES AND SHAREHOLDERS' EQUITY

                                     

Deposits

                                     

Interest bearing checking

    520,973     2,605     1.01 %(4)   291,892     862     0.59 %

Savings deposits

    313,294     394     0.25 %   270,293     165     0.12 %

Money market deposits

    846,721     4,728     1.13 %   643,170     3,060     0.96 %

Certificates of deposit

    186,639     784     0.85 %   339,181     873     0.52 %

Total deposits

    1,867,627     8,511     0.92 %   1,544,536     4,960     0.65 %

Borrowings

    60,733     3,705     12.30 %   58,566     3,642     12.51 %

Total interest bearing liabilities

    1,928,360     12,216     1.28 %   1,603,102     8,602     1.08 %

Noninterest bearing deposits

    576,624                 654,050              

Noninterest-bearing liabilities

    29,717                 20,902              

Total liabilities

    2,534,701                 2,278,054              

Total shareholders' equity

    217,122                 154,636              

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 2,751,823               $ 2,432,690              

Net interest spread(2)

                1.87 %               1.68 %

Net interest-earning assets

 
$

723,051
             
$

759,001
             

Net interest income

        $ 29,255               $ 23,819        

Net interest margin(3)

                2.23 %               2.03 %

Average interest-earning assets to average interest-bearing liabilities

                137.50 %               147.35 %