Commitments, Credit Risk, and Contingencies

12 Months Ended

Dec. 31, 2020

Commitments, Credit Risk, and Contingencies

Commitments, Credit Risk, and Contingencies

Note 24: Commitments, Credit Risk, and Contingencies

Financial Instruments

Merchants offers certain financial instruments, including commitments with contracts that contain credit risk for the Company and others that are subject to certain performance criteria and cancellation by the Company. Such commitments were as follows at December 31, 2020 and 2019:

	December 31,
	2020		2019
	(In thousands)
Commitments subject to credit risk:
Commitments to extend credit	$	1,395,678	$	761,068
Standby letters of credit		50,951		26,944
Warehouse unfunded lines of warehouse credit		26,719		—
Total commitments subject to credit risk	$	1,473,348	$	788,012
Commitments subject to certain performance criteria and cancellation:
Outstanding commitments to originate loans	$	1,827,215	$	886,017
Unfunded construction draws		271,746		287,659
Unfunded lines of warehouse credit		970,891		774,424
Total commitments subject to certain performance criteria and cancellation	$	3,069,852	$	1,948,100

Included in the chart above are the following commitments that are subject to credit risk:

Commitments to extend credit. These are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Standby letters of credit. These instruments are irrevocable, conditional commitments issued by the Company or by another party on behalf of the Company, for a fee, to guarantee the performance of a customer to a third party and

they generally have fixed expiration dates or other termination clauses. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. The Company’s policy for obtaining collateral and/or guarantees and the nature thereof is generally the same as that involved extending commitments to its customers. The Company has not been required to fund nor has it incurred any losses on any standby letter of credit commitment during the years ended December 31, 2020, 2019 or 2018.

Included in the chart above are the following commitments that are subject to certain performance criteria and can be denied by the Company:

Outstanding commitments to originate loans. The Company has entered into funding commitments with customers who have applied for loans that are awaiting closing. The customers must meet certain credit and underwriting criteria before the Company is required to fund the loans. Closing and funding of the majority of these loans is contingent upon various performance criteria by the potential borrower and the commitment may be rescinded by the Company. The Company may also enter into a corresponding sales commitment if it is the Company’s intent to close the loan and to sell the loan after closing.

Unfunded construction draws. Through the Multi-family Mortgage Banking segment, the Company has made commitments to fund certain FHA insured construction loans that are drawn upon throughout the construction period. These commitments are subject to certain performance criteria and inspections throughout the project, and funding can be denied by the Company. As construction draws are disbursed, the amounts are securitized and sold to Ginnie Mae, and the Company continues to service the loans.

Unfunded warehouse lines of credit. Through the Mortgage Warehousing segment, the Company has line of credit agreements with its non-depository financial institution customers engaged in mortgage lending. Funds drawn on the lines of credit are used by the borrowers to fund the loans they originate. The customers’ loans must meet certain credit and underwriting criteria before the Company will fund the draw requests on the lines of credit, and the draw requests can be denied by the Company.

Risk-Sharing Arrangements

As a Fannie Mae multifamily lender, Merchants assumes a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that is sold to Fannie Mae. Under this loss sharing agreement, Merchants bears a risk of up to one-third of incurred losses resulting from borrower defaults. Accordingly, Merchants maintained a reserve liability for this risk-sharing obligation of $448,000 at December 31, 2020 and $277,000 at December 31, 2019. There have been no loans in default during the year ended December 31, 2020, 2019 or 2018.

Leases

The Company has several non-cancellable operating leases, primarily for office space, that expire over the next 1-10 years. Rental expense for these leases was $1.2 million, $1.8 million, and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Future minimum lease payments under operating leases as of December 31, 2020 are as follows:

	December 31,
	2020
	(In thousands)
Due within one year	$	1,278
Due in one year to two years		1,276
Due in two years to three years		1,231
Due in three years to four years		1,004
Due in four years to five years		295
Thereafter		1,255
Total minimum lease payments	$	6,339

Other

The Company and its subsidiaries can be parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the Company’s consolidated financial position or results of operations.