Borrowings

3 Months Ended

Mar. 31, 2023

Borrowings

Borrowings

Note 11: Borrowings

Borrowings were comprised of the following at March 31, 2023 and December 31, 2022:

	March 31,		December 31,
	2023		2022
	(In thousands)
Federal Reserve discount window borrowings	$	200,000	$	20,000
Short-term subordinated debt		21,000		21,000
FHLB advances		859,211		859,392
American Financial Exchange borrowing		—		30,000
Credit linked notes		153,551		—
Total borrowings	$	1,233,762	$	930,392

On March 30, 2023, Merchants Bank of Indiana issued and sold $158.1 million senior credit linked notes, due May 26, 2028. The net proceeds of the offering were approximately $153.5 million. The repayment of principal on the notes is linked to an approximately $1.1 billion reference pool of loans originated under the Bank’s healthcare commercial real estate lending program, but the notes are not secured by the loans. The notes provide periodic payments of interest in addition to payment of principal over the life of the note and these values are tied to the performance of the loans.  Therefore, the notes effectively transfer credit risk in excess of the first 1% of losses on the reference pool of loans. The reduction in risk weighted assets provides additional balance sheet capacity and benefits capital ratios for additional growth in the existing loan pipeline. The Company will maintain the ACL associated with the loans in the reference pool on the Company’s balance sheet.

The notes accrue interest at a rate equal to SOFR plus 15.50% and interest pays monthly. As of March 31, 2023, the effective interest rate was 21.5%. However, the interest earned on the collateral account maintained by the Company for the transaction had an effective rate of 4.5%, resulting in a net effective rate of 17.0% related to the notes. The principal amount of the notes will be reduced by a portion of the Bank’s loss on such loans if one of the following occurs with respect to a loan: (i) the Bank experiences a realized loss, or (ii) an expected loss is determined for any delinquent loan at the stated maturity date or upon early redemption. However, such reduction will not occur until aggregate realized or expected losses reach more than one percent of the principal balance of the loans. The Bank has the right to redeem the notes in full upon the occurrence of certain regulatory events.

The notes are secured by a restricted collateral account which the Company is required to maintain with a third-party financial institution.  The collateral account maintains an amount equal to at least the initial aggregate unpaid principal of the notes.  As of March 31, 2023, the account included $20.5 million of restricted cash and $137.6 million of short-term Treasury securities.  These are reported as cash equivalents and securities available for sale in the consolidated balance sheets.