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"Despite some challenges this quarter, we remain confident in our strategic direction and outlook for future performance. The lower gain on sale of loans and recent deterioration in asset quality are temporary setbacks. Our ongoing efforts to optimize loan workouts and to invest in growth opportunities position us for a stronger and more resilient future.  Our loan pipeline remains strong, and we are well-positioned to execute when the uncertain interest rate environment becomes clearer for our borrowers," said Michael F. Petrie, Chairman and CEO of Merchants.

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Our team has shown remarkable dedication and resilience in navigating new challenges. We are proud of our culture of collaboration and innovation, which drives us to continuously improve and adapt to an ever-changing environment. As we move forward, we are focused on enhancing our operations and investing in our people and processes to ensure long-term success. Together, we are committed to building a stronger foundation for future growth and delivering value to our stakeholders and communities."

Net income of $58.2 million for the first quarter of 2025 decreased by $28.8 million, or 33%, compared to the first quarter of 2024, reflecting market uncertainty that delayed origination closings and permanent loan conversions in a growing pipeline, which negatively impacted the recognition of gain on sale and net interest margin.  The decrease in net income was primarily driven by a $17.2 million, or 42%, decrease in noninterest income, a $12.8 million, or 26%, increase in noninterest expense, a $4.9 million, or 4%, decrease in net interest income, and a $3.0 million, or 63%, increase in provision for credit losses on loans, which was partially offset by a $9.0 million, or 33%, decrease in provision for income tax. Of the $28.8 million decrease in net income, $19.3 million, or $0.34 per diluted common share, was attributable to changes in valuation adjustments. Noninterest income included a $754,000 negative fair market value adjustment to servicing rights and a $2.3 million negative fair market value adjustment to derivatives, which compared to positive fair market value adjustments of $14.0 million to servicing rights and $2.3 million to derivatives, in the first quarter of 2024.

Net income of $58.2 million for the first quarter 2025 decreased by $37.4 million, or 39%, compared to the fourth quarter of 2024, reflecting market uncertainty that delayed origination closings and permanent loan conversions in a growing pipeline, which negatively impacted the recognition of gain on sale and net interest margin.  The decrease in net income was primarily driven by a $35.5 million, or 60%, decrease in noninterest income, a $12.4 million, or 9% decrease in net interest income, and a $5.0 million, or 187%, increase in provision for credit losses on loans, which was partially offset by a $14.0 million, or 43%, decrease in provision for income taxes. Of the $37.4 million decrease in net income, $16.0 million, or $0.26 per diluted common share, was attributable to changes in valuation adjustments.  The decrease in noninterest income reflected lower gain on sale of loans, loan servicing fees, syndication and asset management fees, and other income. Noninterest income included a $754,000 negative fair market value adjustment to servicing rights and a $2.3 million negative fair market value adjustment to derivatives, which compared to positive adjustments of $10.4 million and $2.6 million, respectively, in the fourth quarter of 2024.

Preferred Stock Redemption

The Company redeemed all outstanding shares of the Series B Preferred Stock for approximately $125.0 million on January 2, 2025, at the liquidation preference of $1,000 per share (equivalent to $25 per depositary share). The $4.2 million expenses associated with the original issuance, which were capitalized in 2019, were recognized through retained earnings upon redemption, thus reducing net income available to common shareholders. Similarly, the redemption resulted in an excise tax of $1.2 million that will not be payable until 2025 taxes are due in 2026, and any future issuance of shares until one year after the redemption can offset the amount of excise tax that will be paid.

Total Assets

Total assets of $18.8 billion at March 31, 2025 increased by $975.2 million, or 5%, compared to March 31, 2024, and remained essentially unchanged compared to December 31, 2024. The increase compared to March 31, 2024 was primarily driven by higher balances in the mortgage warehouse portfolios, as well as securities held to maturity.

Return on average assets was 1.31% for the first quarter of 2025 compared to 2.07% for both the first quarter of 2024 and the fourth quarter of 2024.

Asset Quality

The allowance for credit losses on loans of $83.4 million, as of March 31, 2025, increased by $7.7 million, or 10%, compared to March 31, 2024, and decreased by $973,000, or 1%, compared to December 31, 2024.  The $7.7 million increase compared to March 31, 2024 was primarily related to loans in the multi-family portfolio, which were partially offset by charge-offs. The decrease compared to December 31, 2024 was driven by $10.5 million in charge-offs that were partially offset by a $9.5 million increase in provision expense on loans, primarily related to the multi-family portfolio.

The $83.4 million allowance for credit losses on loans as of March 31, 2025, compared to the net charge-offs of $20.2 million over the last twelve months ended March 31, 2025, could absorb four years of losses, assuming recent loss levels continue.

The Company recorded charge-offs for five customers, primarily in the multi-family loan portfolio, totaling $10.5 million, and recorded $28,000 of recoveries during the first quarter 2025. This compares to $925,000 in charge-offs and $1,000 in recoveries during the first quarter of 2024 and to $10.6 million in charge-offs and $136,000 of recoveries in the fourth quarter of 2024.

As of March 31, 2025, non-performing loans were $284.6 million, or 2.73% of loans receivable, compared to $131.8 million, or 1.22%, as of March 31, 2024, and $279.7 million, or 2.68%, as of December 31, 2024.  The increase in non-performing loans compared to March 31, 2024 was primarily driven by multi-family and healthcare customers with delinquent payments on variable rate loans that have required higher payments, as well as the financial deterioration of a few sponsors.  The higher payments are associated with the floating nature of the loan terms, which has resulted in elevated interest rates relative to when the loans were originated. The $4.9 million increase compared to December 31, 2024 was primarily due to one multi-family customer. Delinquency levels on total loans have modestly increased by $10.1 million, to $334.7 million, compared to December 31, 2024.

As of March 31, 2025, all substandard loans have been evaluated for impairment and these loans have specific reserves of $20.9 million. Although there has been an increase in adversely classified loans, underlying asset values remain strong overall and loans are well-collateralized.

The Company has been making additional efforts to reduce its credit risk through loan sale and securitization activities since 2019.  In April of 2023, as well as March and December of 2024, the Company strategically executed credit protection arrangements through a credit linked note and credit default swaps totaling $2.9 billion in loans to reduce risk of losses, with incremental coverage ranging from 13-14% of the unpaid principal balances for each arrangement.  Despite having credit protection on these loans, the Company also continues to carry an allowance for credit losses on loans held for investment. As of March 31, 2025, the balance of loans subject to credit protection arrangements was $2.2 billion.

Securities Available for Sale

Total securities available for sale of $961.2 million as of March 31, 2025 decreased by $100.1 million, or 9%, compared to March 31, 2024, and decreased by $18.9 million, or 2%, compared to December 31, 2024. The decrease compared to March 31, 2024 was primarily due to maturities and repayments, as well as fair value adjustments that were partially offset by purchases.

Securities Held to Maturity

Total securities held to maturity of $1.6 billion as of March 31, 2025 increased by $431.1 million, or 37%, compared to March 31, 2024, and decreased $58.4 million, or 4%, compared to December 31, 2024. The increase compared to March 31, 2024 was primarily due to purchases of senior investment securities backed by residential and healthcare loans retained as part of credit risk transfer securitization transactions originated by the Company. The lower-risk, senior certificates represent nearly 90% of the beneficial interests, while the remaining subordinated certificates are held by third parties, thereby minimizing the risk of loss to the Company.

Total Deposits

Total deposits of $12.4 billion at March 31, 2025 decreased by $1.6 billion, or 11%, compared to March 31, 2024, and increased by $486.2 million, or 4%, compared to December 31, 2024. The decrease compared to March 31, 2024 was driven by reductions in brokered certificates of deposit accounts, in favor of additional cost-effective borrowing. The change compared to December 31, 2024 was primarily due to growth in core deposits.

Core deposits of $10.7 billion at March 31, 2025 increased by $2.5 billion, or 30%, from March 31, 2024 and increased by $1.3 billion, or 14%, from December 31, 2024. Core deposits represented 86% of total deposits at March 31, 2025, 59% of total deposits at March 31, 2024, and 79% of total deposits at December 31, 2024.

Total brokered deposits of $1.7 billion at March 31, 2025 decreased $4.0 billion, or 70%, from March 31, 2024 and decreased $815.7 million, or 32%, from December 31, 2024.   As of March 31, 2025, brokered certificates of deposit had a weighted average remaining duration of 67 days.

Liquidity

Cash balances of $521.3 million as of March 31, 2025 increased by $12.5 million, or 2%, compared to March 31, 2024 and increased by $44.7 million, or 9%, compared to December 31, 2024.  The Company continues to have significant borrowing capacity, with unused lines of credit totaling $4.7 billion as of March 31, 2025 compared to $5.6 billion at March 31, 2024 and $4.3 billion at December 31, 2024.  Furthermore, its $3.3 billion line of credit availability with the Federal Reserve Bank of Chicago alone could fund 107% of its uninsured deposits, which represented approximately 24% of total bank deposits as of March 31, 2025.

This liquidity enhances the Company's ability to effectively manage interest expense and asset levels in the future. Additionally, the Company's business model is designed to continuously sell or securitize a significant portion of its loans, which provides flexibility in managing its liquidity.

Comparison of Operating Results for the Three Months Ended

March 31, 2025 and 2024

Net Interest Income of $122.2 million decreased $4.9 million, or 4%, compared to $127.1 million, reflecting lower interest income and higher interest expense on borrowings, which were partially offset by lower interest expense on deposits.

• Net interest margin of 2.89% decreased 25 basis points compared to 3.14%. The margin was negatively impacted by a significant shift in business mix, as lower-margin loans held for sale balances, consisting of primarily warehouse loans, grew by $480.3 million, or 14%, and warehouse repurchase agreements grew by $265.3 million, or 23%, while higher-margin loans receivable balances contracted by $339.1, or 3%.

• Interest rate spread of 2.38% decreased 20 basis points compared to 2.58%.

Interest Income of $287.2 million decreased $27.0 million, or 9%, compared to $314.2 million. The decrease primarily reflected lower average yields on loans and loans held for sale, partially offset by higher average balances on securities held to maturity.

• Average yields on loans and loans held for sale of 7.06% decreased 105 basis points compared to 8.11%.

• Average balances of $13.8 billion for loans and loans held for sale increased $256.2 million, or 2% compared to $13.5 billion.

• Average balances of $1.6 billion for securities held to maturity increased $447.1 million, or 37%, compared to $1.2 billion.

Interest Expense of $165.0 million decreased $22.1 million, or 12%, compared to $187.1 million.  The decrease reflected lower average balances at lower average rates on certificates of deposit that were partially offset by higher average balances at lower average rates on borrowings.

• Average balances of $3.4 billion for certificates of deposit decreased by $2.3 billion, or 41%, compared to $5.7 billion.

• Average interest rates of 4.67% for certificates of deposit decreased by 73 basis points compared to 5.40%.

• Average balances of $3.1 billion for borrowings increased by $2.4 billion, or 336%, compared to $716.9 million.

• Average interest rates of 5.33% for borrowings decreased by 370 basis points compared to 9.03%.

Noninterest Income of $23.7 million decreased $17.2 million, or 42%, compared to $40.9 million, primarily due to a $19.3 million change in valuation adjustments. The $17.2 million decrease reflected a $15.4 million, or 79%, decrease in loan servicing fees and a $2.8 million, or 47%, decrease other income, partially offset by a $2.3 million, or 24%, increase in gain on sale of loans. 

• Loan servicing fees included a $754,000 negative fair market value adjustment to servicing rights, with a $1.2 million negative adjustment in the Banking segment and a $449,000 positive adjustment in the Multi-family Mortgage Banking segment. This compared to a $14.0 million positive fair market value adjustment to servicing rights in the prior period with a $0.8 million positive adjustment in the Banking segment and a $13.2 million positive adjustment in the Multi-family Mortgage Banking segment. The value of servicing rights generally increases in rising 10-year interest rate environments and declines in falling interest rate environments due to expected prepayments and earning rates on escrow deposits.

• Other income included a $2.3 million negative fair market value adjustment to the floor derivatives compared to a $2.3 million positive fair market value adjustment in the prior period.

• Gain on sale of loans increased $2.3 million, or 24%, reflecting higher volume in the multi-family loan portfolio.

Noninterest Expense of $61.7 million increased $12.8 million, or 26%, compared to $48.9 million, primarily due to a $6.8 million, or 23%, increase in salaries and employee benefits to support business growth, including $2.5 million associated with the addition of production staff, which is expected to elevate production, gain on sale and expenses in future quarters as well.  Also contributing to the higher expenses during the quarter, was a $3.9 million increase in credit risk transfer premium expense associated with ongoing credit default swaps that were executed in March and December 2024, as well as a $2.1 million, or 41%, increase in deposit insurance expense, reflecting an increase in underperforming assets, coupled with an increase in total assets.

Comparison of Operating Results for the Three Months Ended

March 31, 2025 and December 31, 2024

Net Interest Income of $122.2 million decreased $12.4 million, or 9%, compared to $134.6 million, primarily due to lower average yields on lower average balances on loans and loans held for sale. These decreases were partially offset by lower average balances on certificates of deposit at lower rates.

• Net interest margin of 2.89% decreased 10 basis points compared to 2.99%. The margin was negatively impacted by a shift in business mix, as lower-margin loans held for sale balances, consisting of primarily warehouse loans, grew by $211.9 million, or 6%, and higher-margin loans receivable balances contracted by $11.3 million during the quarter.

• Interest rate spread of 2.38% decreased 8 basis points compared to 2.46%.

Interest Income of $287.2 million decreased $34.1 million, or 11%, compared to $321.3 million, primarily reflecting a decrease in average yield and balances on loans and loans held for sale and a decrease in average yield on securities held to maturity.

• Average yields on loans and loans held for sale of 7.06% decreased 37 basis points compared to 7.43%.

• Average balances of $13.8 billion for loans and loans held for sale decreased $534.7 million, or 4%, compared to $14.3 billion.

• Average yields on securities held to maturity of 6.01% decreased 46 basis points compared to 6.47%.

Interest Expense of $165.0 million decreased $21.7 million, or 12% compared to $186.7 million. The decrease was primarily driven by lower average balances at lower rates on certificates of deposit and partially offset by higher average balances on money market accounts.

• Average balances of $3.4 billion for certificate of deposit accounts decreased $746.2 million, or 18%, compared to $4.1 billion.

• Average interest rates of 4.67% for certificate of deposit accounts decreased 35 basis points compared to 5.02%.

• Average balances of $5.1 billion for interest-bearing checking accounts decreased $458.3 million, or 8%, compared to $5.6 billion.

• Average interest rates of 4.01% for interest-bearing checking accounts decreased 18 basis points compared to 4.19%.

Noninterest Income of $23.7 million decreased $35.5 million, or 60%, primarily due to an $13.4 million, or 54%, decrease in gain on sale of loans, a $10.9 million, or 73%, decrease in loan servicing fees, a $5.9 million, or 64%, decrease in syndication and asset management fees, and a $5.3 million, or 63%, decrease in other income.

• Gain on sale of loans decreased $13.4 million, as elevated interest rates have contributed to delays in borrowers converting to permanent loans.

• Loan servicing fees included a $754,000 negative fair market value adjustment to servicing rights, with a $1.2 million negative adjustment in the Banking segment and a $449,000 positive adjustment in the Multi-family Mortgage Banking segment. This compared to a $10.4 million positive fair market value adjustment to servicing rights in the prior period, with a $2.5 million positive adjustment in the Banking segment and a $7.9 million positive adjustment in the Multi-family Mortgage Banking segment. The value of servicing rights generally increases in rising 10-year interest rate environments and declines in falling interest rate environments due to expected prepayments and earning rates on escrow deposits.

• Other income included a $2.3 million negative fair market value adjustment to floor derivatives compared to a $2.6 million positive fair market value adjustment to derivatives in the fourth quarter of 2024.

Noninterest Expense of $61.7 million decreased $1.5 million, or 2%, compared to $63.2 million, primarily driven by a $2.2 million, or 44%, decrease in professional fees, which was partially offset by a $1.9 million, or 98%, increase in credit risk transfer premium expense.

About Merchants Bancorp

Ranked as a top performing U.S. public bank by S&P Global Market Intelligence, Merchants Bancorp is a diversified bank holding company headquartered in Carmel, Indiana operating multiple segments, including Multi-family Mortgage Banking that primarily offers multi-family housing and healthcare facility financing and servicing (through this segment it also serves as a syndicator of low-income housing tax credit and debt funds); Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers retail and correspondent residential mortgage banking, agricultural lending, and traditional community banking.  Merchants Bancorp, with $18.8 billion in assets and $12.4 billion in deposits as of March 31, 2025, conducts its business primarily through its direct and indirect subsidiaries, Merchants Bank of Indiana, Merchants Capital Corp., Merchants Capital Investments, LLC, Merchants Capital Servicing, LLC, Merchants Asset Management, LLC, and Merchants Mortgage, a division of Merchants Bank of Indiana. For more information and financial data, please visit Merchants' Investor Relations page at investors.merchantsbancorp.com.

Forward-Looking Statements 

This press release contains forward-looking statements which reflect management's current views with respect to, among other things, future events and 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 the industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, management cautions 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 the Company believes 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 actual results to differ materially from those indicated in these forward-looking statements, including the impacts of factors identified in "Risk Factors" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission.  Any forward-looking statements presented herein are made only as of the date of this press release, and the Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

 

 

 

 

 

 

 

 

 

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