Merchants Bancorp Reports Fourth Quarter 2024 Results

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Looking ahead, we remain focused on leveraging our financial flexibility to drive sustainable growth. Despite increases in nonperforming loans over the last few quarters, delinquencies have declined, and charge-offs have been minimal. Our strategic initiatives, including the recent credit risk transfer transactions, as well as common and preferred stock offerings, strengthened our capital position and further mitigated risk.  We are confident in our exceptional team's ability to continue delivering profitable growth in the coming years."

Net income of $95.7 million for the fourth quarter of 2024 increased by $18.2 million, or 23%, compared to the fourth quarter of 2023, primarily driven by a $24.7 million, or 72%, increase in noninterest income and a $10.3 million, or 8%, increase in net interest income, which was partially offset by a $10.6 million, or 20%, increase in noninterest expense. Noninterest income included a $10.4 million positive fair market value adjustment to servicing rights and a $2.6 million positive fair market value adjustment to derivatives, which compared to a $7.6 million negative fair market value adjustment to servicing rights and a positive fair market value adjustment of $6.6 million to derivatives in the fourth quarter of 2023.

Net income of $95.7 million for the fourth quarter 2024 increased by $34.4 million, or 56%, compared to the third quarter of 2024, primarily driven by a $42.4 million, or 253%, increase in noninterest income that reflected higher gain on sale of loans, loan servicing fees, syndication and asset management fees, and other income. Noninterest income included a $10.4 million positive fair market value adjustment to servicing rights and a $2.6 million positive fair market value adjustment to derivatives, which compared to negative adjustments of $6.7 million and $7.7 million, respectively, in the third quarter of 2024.

Total Assets
Total assets of $18.8 billion at December 31, 2024 increased by $152.8 million, or 1%, compared to September 30, 2024, and increased by $1.9 billion, or 11%, compared to December 31, 2023.  The increase compared to December 31, 2023 was primarily due to growth in loans held for sale and in the warehouse, and multi-family loan portfolios. There was also an increase in securities held to maturity compared to December 31, 2023, reflecting the purchase of a security representing healthcare loans sold into a securitization in the third quarter of 2024 that was offset by a decline in loans in the healthcare portfolio that were sold into the securitization.

Return on average assets was 2.07% for the fourth quarter of 2024 compared to 1.86% for the fourth quarter of 2023 and 1.34% for the third quarter of 2024.  Return on average assets was 1.79% for the full year 2024 compared to 1.85% for the full year 2023.

Asset Quality
The allowance for credit losses on loans of $84.4 million, as of December 31, 2024, decreased by $163,000 compared to September 30, 2024, and increased by $12.6 million, or 18%, compared to December 31, 2023.  The $163,000 decrease compared to September 30, 2024 reflected an increase in provision for credit losses on loans in the multi-family portfolio that was essentially offset by a partial charge-off of one multi-family loan that was previously fully reserved. The increase compared to December 31, 2023 was driven by a $16.7 million increase in specific reserves, primarily related to five customers.  This increase was partially offset by lower loan balances due to the securitization of healthcare loans, which reduced the allowance by approximately $4.4 million.

The $84.4 million allowance for credit losses on loans as of December 31, 2024, compared to the net charge-offs of $10.5 million over the last twelve months ended December 31, 2024, could absorb eight years of losses, assuming recent loss levels continue.

The Company recorded charge-offs for three customers, primarily in the multi-family loan portfolio, totaling $4.2 million, and recorded $113,000 of recoveries during the fourth quarter 2024. This compares to $238,000 in charge-offs and $1,000 in recoveries during the fourth quarter of 2023 and to $2.1 million in charge-offs and $7,000 of recoveries in the third quarter of 2024.

As of December 31, 2024, non-performing loans were $279.7 million, or 2.68% of gross loans receivable, compared to $210.9 million, or 2.04%, as of September 30, 2024, and $82.0 million, or 0.80%, as of December 31, 2023.  The increase in non-performing loans compared to both periods was primarily driven by multi-family and healthcare customers with delinquent payments on variable rate loans that have required higher payments largely due to higher interest rates since the loans were originated and the financial deterioration of a few sponsors.  Delinquency levels on total loans have declined by $56.3 million, to $324.6 million, compared to September 30, 2024.

All substandard loans as of December 31, 2024 have been evaluated for impairment and these loans have specific reserves of $23.4 million, including $4.2 million added during the fourth quarter of 2024. Although there has been an increase in adversely classified loans, underlying asset values remain strong overall and loans are well-collateralized.

In addition to elevated reserves for credit losses on loans compared to December 2023, 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 December 31, 2024, the balance of loans in credit protection arrangements was $2.3 billion.

Securities Available for Sale
Total securities available for sale of $980.0 million as of December 31, 2024 increased by $27.0 million, or 3%, compared to September 30, 2024, and decreased by $133.6 million, or 12%, compared to December 31, 2023.  The decrease 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 $1.7 billion as of December 31, 2024 decreased by $90.4 million, or 5%, compared to September 30, 2024, and increased $460.5 million, or 38%, compared to December 31, 2023. The decrease compared to September 30, 2024 was primarily due to repayments. The increase from December 31, 2023 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.

Total Deposits
Total deposits of $11.9 billion at December 31, 2024 decreased by $971.9 million, or 8%, compared to September 30, 2024, and decreased by $2.1 billion, or 15%, compared to December 31, 2023. The change compared to both periods was driven by decreases in brokered certificates of deposit accounts and demand accounts.

Core deposits of $9.4 billion at December 31, 2024 decreased by $708.1 million, or 7%, from September 30, 2024 and increased by $1.3 billion, or 16%, from December 31, 2023. Core deposits represented 79% of total deposits at December 31, 2024, 78% of total deposits at September 30, 2024, and 58% of total deposits at December 31, 2023.

Total brokered deposits of $2.5 billion at December 31, 2024 decreased $263.8 million, or 9%, from September 30, 2024 and decreased $3.4 billion, or 58%, from December 31, 2023.   As of December 31, 2024, brokered certificates of deposit had a weighted average remaining duration of 49 days.

Liquidity
Cash balances of $476.6 million as of December 31, 2024 decreased by $125.3 million, or 21%, compared to September 30, 2024 and decreased by $107.8 million, or 18%, compared to December 31, 2023.  The Company continues to have significant borrowing capacity, with unused lines of credit totaling $4.3 billion as of December 31, 2024 compared to $5.1 billion at September 30, 2024 and $6.0 billion at December 31, 2023.  Furthermore, its $3.1 billion line of credit availability with the Federal Reserve Bank of Chicago alone could fund 111% of its uninsured deposits, which represented approximately 24% of total deposits as of December 31, 2024.

This liquidity enhances the 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

December 31, 2024 and 2023

Net Interest Income of $134.6 million increased $10.3 million, or 8%, compared to $124.3 million, primarily due to higher interest income reflecting increases in average balances in loans and loans held for sale, as well as securities held to maturity, which were partially offset by lower average yields on loans and loans held for sale.

• Net interest margin of 2.99% decreased 6 basis points compared to 3.05%. The margin was negatively impacted by 5 basis points in the fourth quarter of 2024 from the net reversal of $2.1 million in accrued interest income associated with the movement of loans into nonaccrual status.
• Interest rate spread of 2.46% decreased 2 basis points compared to 2.48%.

Interest Income of $321.3 million increased $9.6 million, or 3%, primarily reflecting an increase in average balances of loans and loans held for sale, securities held to maturity, partially offset by lower average yields on loans and loans held for sale.

• Average balances of $14.3 billion for loans and loans held for sale increased $611.1 million, or 4% compared to $13.7 billion.
• Average balances of $1.7 billion for securities held to maturity increased $559.9 million, or 49%, compared to $1.1 billion.
• Average yields on loans and loans held for sale of 7.43% decreased 55 basis points compared to 7.98%.

Interest Expense of $186.7 million decreased $0.7 million compared to $187.4 million.  The decrease reflected higher average balances on borrowings at lower average rates and lower average balances on certificates of deposit at lower average rates.

• Average balances of $3.0 billion for borrowings increased by $2.3 billion, or 323%, compared to $720.5 million.
• Average interest rates of 5.58% for borrowings decreased by 288 basis points compared to 8.46%.
• Average balances of $4.1 billion for certificates decreased by $908.0 million, or 18%, compared to $5.0 billion.
• Average interest rates of 5.02% for certificates of deposit decreased by 41 basis points compared to 5.43%.

Noninterest Income of $59.1 million increased $24.7 million, or 72%, primarily due to a $17.1 million, or 792%, increase in net loan servicing fees, a $5.7 million, or 29%, increase in gain on sale of loans, and a $4.4 million, or 91%, increase in syndication and asset management fees.    

• Loan servicing fees included a $10.4 million positive fair market value adjustment to servicing rights, 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. This compared to a $7.6 million negative fair market value adjustment to servicing rights in the prior period with a $1.1 million negative adjustment in the Banking segment and a $6.5 million negative 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.
• Gain on sale of loans increased $5.7 million, or 29%, reflecting higher volume in the multi-family loan portfolio.
• Other income included a $2.6 million positive fair market value adjustment to derivatives compared to a $6.6 million positive fair market value adjustment in the prior period.

Noninterest Expense of $63.2 million increased $10.6 million, or 20%, compared to $52.6 million, primarily due to increases in salaries and employee benefits to support business growth, as well as a $2.4 million, or 61%, increase in deposit insurance expenses. The higher noninterest expense also reflected a $1.9 million increase in credit risk transfer premium expense associated with ongoing credit default swaps that were executed in March and December 2024.

• The efficiency ratio of 32.62% decreased 49 basis points compared to 33.11%.

Comparison of Operating Results for the Three Months Ended

December 31, 2024 and September 30, 2024

Net Interest Income of $134.6 million increased $1.8 million, or 1%, compared to $132.8 million, primarily due to higher average balances on borrowings at lower average interest rates. Lower average balances on loans and loans held for sale and certificates of deposit continued to reprice at lower rates, which also contributed to higher net interest income.

• Net interest margin of 2.99% remain unchanged. The margin was negatively impacted by 5 basis points in the fourth quarter of 2024 from the net reversal of $2.1 million in accrued interest income associated with the movement of loans into nonaccrual status. This compared to 6 basis points, or $2.9 million in accrued interest income in the third quarter of 2024.
• Interest rate spread of 2.46% increased 3 basis points compared to 2.43%.

Interest Income of $321.3 million decreased $17.6 million, or 5%, compared to $338.9 million, primarily reflecting a decrease in average yield and balances on loans and loans held for sale, partially offset by increased average balances on securities held to maturity.

• Average yields on loans and loans held for sale of 7.43% decreased 48 basis points compared to 7.91%.
• Average balances of $14.3 billion for loans and loans held for sale decreased $317.9 million, or 2%, compared to $14.6 billion.
• Average balances of $1.7 billion for securities held to maturity increased 413.1 million, or 32%, compared to $1.3 billion.

Interest Expense of $186.7 million decreased $19.4 million, or 9% compared to $206.1 million. The decrease was primarily driven by lower average balances and rates on certificates of deposit, as well as lower average rates on interest-bearing checking accounts. The decreases were partially offset by higher average balances on borrowings at lower average rates.  

• Average balances of $4.1 billion for certificate of deposit accounts decreased $916.7 million, or 18%, compared to $5.0 billion.
• Average interest rates of 5.02% for certificate of deposit accounts decreased 45 basis points compared to 5.47%.
• Average interest rates of 4.19% for interest-bearing checking accounts decreased 51 basis points compared to 4.70%.
• Average balances of $3.0 billion for borrowings increased $529.2 million, or 21%, compared to $2.5 billion.
• Average interest rates of 5.58% for borrowings decreased 81 basis points compared to 6.39%.

Noninterest Income of $59.1 million increased $42.4 million, or 253%, compared $16.7 million, primarily due to a $16.5 million, or 1091%, increase in net loan servicing fees, a $10.4 million, or 536%, increase in other income, an $8.3 million, or 50%, increase in gain on sale of loans, and a $7.5 million, or 408%, increase in syndication and asset management fees. 

• Loan servicing fees included a $10.4 million positive fair market value adjustment to servicing rights, 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. This compared to a $6.7 million negative fair market value adjustment to servicing rights in the prior period, with a $1.6 million negative adjustment in the Banking segment and a $5.1 million negative 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 $2.6 million positive fair market value adjustment to derivatives compared to a $7.7 million negative fair market value adjustment to derivatives in the third quarter of 2024.
• Gain on sale of loans increased $8.3 million reflecting higher volume in the multi-family loan portfolio.

Noninterest Expense of $63.2 million increased $1.9 million, or 3%, compared to $61.3 million, primarily driven by a $2.3 million, or 7%, increase in salaries and employee benefits reflecting higher commissions on higher production volume and a 49% increase in professional fees, which was partially offset by a 28% decrease in deposit insurance expense.

• The efficiency ratio of 32.62% decreased 838 basis points compared to 41.00%.

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 $11.9 billion in deposits as of December 31, 2024, 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.