Merchants Bancorp Reports Fourth Quarter 2025 Results

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Our team's disciplined execution and commitment to excellence have driven meaningful progress. The improvement in credit quality, combined with strong liquidity and operational performance, reinforces our confidence in the year ahead. We remain focused on harnessing this momentum to deliver strategic, sustainable growth and long-term value for our shareholders and communities."

Net income of $67.8 million for the fourth quarter of 2025 increased by $13.1 million, or 24%, compared to the third quarter of 2025.  The improvement was primarily driven by an $11.5 million, or 12%, increase in net interest income after provision for credit losses, reflecting increased net interest income and lower provision expenses associated with asset quality improvements.  Results also reflected a $4.2 million, or 10%, increase in noninterest income reflecting higher positive fair value adjustments for derivatives, and a $3.8 million decrease in provision for income taxes, which benefited primarily from the utilization of tax credits. These increases to net income were partially offset by a $6.4 million, or 8%, increase in noninterest expense.

Net income of $67.8 million for the fourth quarter of 2025 decreased by $27.8 million, or 29%, compared to the fourth quarter of 2024. The decline was primarily driven by a $21.6 million, or 16%, decrease in net interest income after provision for credit losses, reflecting higher provision expenses. Results also reflected a $20.4 million, or 32%, increase in noninterest expense, largely attributable to increased costs associated with credit risk transfer premiums, higher salaries and employee benefits, as well as collateral preservation expenses. Also contributing to the decline was an $11.9 million, or 20%, decrease in noninterest income, reflecting lower fair value adjustments for servicing rights included in loan servicing fees. These decreases to net income were partially offset by a $26.2 million, or 81%, decrease in the provision for income taxes, which reflected lower net income and the utilization of tax credits.

Total Assets
Total assets of $19.4 billion at December 31, 2025 increased by $94.3 million compared to September 30, 2025, and $643.2 million, or 3%, compared to December 31, 2024. The increase compared to December 31, 2024 was primarily due to higher balances in the multi-family and warehouse portfolios, including those held for sale, in process of securitization, or held for investment. These were partially offset by lower balances in the residential loan portfolio.

Asset Quality
The allowance for credit losses on loans of $83.3 million, as of December 31, 2025, decreased by $10.0 million, or 11%, compared to September 30, 2025, and decreased by $1.1 million, or 1%, compared to December 31, 2024.  The decreases for both periods were driven by charge-offs on loans with specific reserves, partially offset by provision for credit losses.

The Company recorded charge-offs for 12 relationships, primarily in the multi-family loan portfolio, totaling $38.0 million, and $76,000 in recoveries during the fourth quarter of 2025.   Approximately 75% of the charge-offs were associated with three relationships.  This compares to $4.2 million in charge-offs and $113,000 in recoveries during the fourth quarter of 2024 and $29.5 million in charge-offs and $23,000 in recoveries in the third quarter of 2025.

The charge-offs and increases to provision for credit losses for the third and fourth quarters were largely associated with declines on certain multi-family property values after receiving new appraisals and the ongoing investigation of borrowers involved in mortgage fraud or suspected fraud, as well as loan growth. The increases were also attributable to certain types of subordinated loans that the Company no longer offers to borrowers.  These underperforming loans have been largely identified and evaluated for potential losses that have either been included in the allowance for credit losses on loans as specific reserves or charged-off.

Overall, criticized loans receivable of $508.2 million declined by $74.0 million, or 13%, compared to September 30, 2025, and declined by $189.1 million, or 27% compared to December 31, 2024. This decline reinforces the view that the frequency of migration to criticized status would subside, driven by favorable market conditions and the Company's efforts with proactive portfolio management.  

As of December 31, 2025, all substandard loans have been evaluated for impairment, and these loans have specific reserves of $16.0 million.  The Company believes that the remaining loan portfolio remains well collateralized.

Non-performing loans decreased 34% during the quarter, primarily attributable to progress with one multi-family relationship that was moved to other real estate owned, and several charge-offs.  As of December 31, 2025, non-performing loans were $197.8 million, or 1.79% of loans receivable, compared to $298.3 million, or 2.81%, as of September 30, 2025, and $279.7 million, or 2.68%, as of December 31, 2024. 

Total delinquent loans also declined 38%, from $336.2 million as of September 30, 2025, to $206.8 million as of December 31, 2025.

The Company has been making additional efforts to reduce its credit risk through loan sale and securitization activities since 2019.  Since 2023, the Company has strategically executed credit protection arrangements through credit default swaps and a credit-linked note to reduce risk of losses, with coverage ranging from 13-15% of the unpaid principal balances for each arrangement.  Despite having credit protection on these loans, the Company is required to carry an allowance for credit losses on loans held for investment. As of December 31, 2025, the credit- linked note was repaid in full and the remaining balance of loans protected by credit default swaps was $2.8 billion.

Total Deposits
Total deposits of $13.0 billion at December 31, 2025 decreased by $893.5 million, or 6%, compared to September 30, 2025, and increased by $1.1 billion, or 9%, compared to December 31, 2024. The decrease compared to September 30, 2025 primarily reflects the expected seasonal fluctuations in core deposits.

Core deposits of $11.3 billion at December 31, 2025 decreased by $1.5 billion, or 12%, from September 30, 2025 and increased by $1.9 billion, or 20%, from December 31, 2024. Core deposits represented 87% of total deposits at December 31, 2025, 92% of total deposits at September 30, 2025, and 79% of total deposits at December 31, 2024.

Total brokered deposits of $1.8 billion at December 31, 2025 increased $613.3 million, or 54%, from September 30, 2025 and decreased $776.8 million, or 31%, from December 31, 2024.   As of December 31, 2025, brokered certificates of deposit had a weighted average remaining duration of 59 days.

Preferred Stock Redemption
When the Company redeemed its Series B preferred stock on January 2, 2025, it was anticipated that there would be $1.2 million in excise tax that would be due in 2026.  However, the Internal Revenue Service finalized rules in November 2025, which exempted this transaction from excise tax.  Accordingly, $1.2 million was reversed during the fourth quarter of 2025.

Liquidity
The Company maintains exceptional liquidity, supported by substantial borrowing capacity available, including unused lines of credit totaling $5.3 billion as of December 31, 2025, compared to $5.9 billion at September 30, 2025 and $4.3 billion at December 31, 2024. 

The Company's most liquid assets are in cash, short-term investments, including interest-earning demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable. Taken together with its unused borrowing capacity of $5.3 billion described above, these totaled $11.6 billion, or 60%, of its $19.4 billion total assets as of December 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

December 31, 2025 and 2024

Net Interest Income of $138.1 million increased $3.5 million, or 3%, compared to $134.6 million, reflecting lower interest expense on certificates of deposit, partially offset by lower interest income on loans.

• Net interest margin of 2.89% decreased 10 basis points compared to 2.99%.
• Interest rate spread of 2.44% decreased two basis points compared to 2.46%.
• While the spread between asset yields and funding costs remained relatively stable, the overall margin declined due primarily to lower asset yields and changes in balance sheet mix, including loan growth supported by the Company's strong capital and liquidity position rather than additional interest-bearing funding. The margin was also negatively impacted by the remaining unamortized debt discount associated with the credit-linked notes that were fully repaid during the current quarter.

Interest Income of $307.5 million decreased 4%, compared to $321.3 million. The decrease primarily reflected lower average yields on higher average balances on loans and loans held for sale, as well as lower average yields on securities held to maturity.

• Average yields on loans and loans held for sale of 6.66% decreased 77 basis points compared to 7.43%.
• Average balances of $15.4 billion for loans and loans held for sale increased by $1.1 billion, or 8%, compared to $14.3 billion.
• Average yields on securities held to maturity of 5.65% decreased 82 basis points compared to 6.47%.

Interest Expense of $169.4 million decreased $17.3 million, or 9%, compared to $186.7 million.  The decrease reflected lower average balances at lower average rates on certificates of deposit, which were partially offset by higher average balances at lower average rates on interest-bearing checking accounts as well as money market/savings deposits.

• Average balances of $1.8 billion for certificates of deposit decreased by $2.3 billion, or 56%, compared to $4.1 billion.
• Average interest rates of 4.13% for certificates of deposit decreased by 89 basis points compared to 5.02%.
• Average balances on interest-bearing checking accounts of $7.6 billion increased by $2.0 billion, or 37%, compared to $5.6 billion.
• Average balances on money market/savings accounts of $3.9 billion increased by $0.8 billion, or 25%, compared to $3.1 billion.

Noninterest Income of $47.2 million decreased $11.9 million, or 20%, compared to $59.1 million. The $11.9 million decrease reflected a $10.7 million, or 72%, decrease in loan servicing fees and a $3.6 million, or 39%, decrease in syndication and asset management fees, partially offset by an increase in other noninterest income of $1.3 million, or 16%.    

• Loan servicing fees included a $179,000 negative fair market value adjustment to servicing rights, with a $275,000 negative adjustment in the Banking segment and a $96,000 positive adjustment in the Multi-family Mortgage Banking segment. This is 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 that are influenced by projected future interest rates on escrow deposits.
• Other income included a $4.2 million positive fair market value adjustment to floor derivatives compared to a $2.6 million positive fair market value adjustment in the prior period. The current quarter also reflected an impairment of $4.1 million for an investment in a joint venture.

Noninterest Expense of $83.6 million increased $20.4 million, or 32%, compared to $63.2 million, primarily due to a $6.3 million increase in credit risk transfer premium expense associated with credit default swaps, a $4.8 million, or 13%, increase in salaries and employee benefits to support business growth, as well as $3.8 million in collateral preservation expenses associated with taxes, insurance, property expenses, and legal fees related to nonperforming assets.

Comparison of Operating Results for the Three Months Ended

December 31, 2025 and September 30, 2025

Net Interest Income of $138.1 million increased $10.0 million, or 8%, compared to $128.1 million, reflecting higher interest income and lower interest expense on deposits, partially offset by higher interest expense on borrowings.

• Net interest margin of 2.89% increased 7 basis points compared to 2.82%. The improvement primarily reflected a more rapid decline in funding costs relative to asset yields and fewer reversals of interest income on nonaccrual loans. This improvement was partially offset by the impact of the unamortized debt discount associated with the credit-linked notes that were fully repaid during the current quarter.
• Interest rate spread of 2.44% increased 11 basis points compared to 2.33%.

Interest Income of $307.5 million increased $5.7 million, or 2%, compared to $301.8 million, primarily reflecting higher average balances at lower average yields on loans and loans held for sale, as well as mortgage loans in process of securitization.

• Average balances of $15.4 billion for loans and loans held for sale increased $714.2 million, or 5% compared to $14.7 billion.
• Average yields on loans and loans held for sale of 6.66% decreased 22 basis points compared to 6.88%.
• Average balances of $506.7 million for mortgage loans in process of securitization increased $111.3 million, or 28%, compared to $395.4 million.
• Average yields on mortgage loans in process of securitization of 5.26% declined 7 basis points compared to 5.33%

Interest Expense of $169.4 million decreased $4.3 million, or 2% compared to $173.7 million. The decrease was primarily driven by lower average rates on deposit accounts and lower average balances on certificates of deposit, partially offset by higher average balances at lower rates on borrowings.  

• Average interest rates on interest-bearing deposit accounts of 3.76% decreased by 35 basis points compared to 4.11%.
• Average balances of $1.8 billion for certificates of deposit decreased $420.3 million, or 19%, compared to $2.2 billion.
• Average balances of $3.5 billion for borrowings increased $1.0 billion, or 42%, compared to $2.5 billion.
• Average interest rates on borrowings of 4.88% decreased by 56 basis points compared to 5.44%.

Noninterest Income of $47.2 million increased $4.2 million, or 10%, compared to $43.0 million. The increase was primarily due to a $6.0 million, or 160%, increase in other income, and a $1.1 million, or 4%, increase in gain on sale of loans, partially offset by a $3.8 million, or 47%, decrease in loan servicing fees.

• Other income included a $4.2 million positive fair market value adjustment to floor derivatives compared to a $770,000 negative fair market value adjustment to derivatives in the prior period. The current quarter also reflected an impairment of $4.1 million for an investment in a joint venture.
• Gain on sale of loans increased $1.1 million, or 4%, reflecting continued strength of secondary market sales in the multi-family loan portfolio, including Freddie Mac-sponsored Q-Series securitization transactions.
• Loan servicing fees included a $179,000 negative fair market value adjustment to servicing rights, with a $275,000 negative adjustment in the Banking segment and a $96,000 positive adjustment in the Multi-family Mortgage Banking segment. This compared to a $2.1 million positive fair market value adjustment to servicing rights in the prior period, with a $394,000 negative adjustment in the Banking segment and a $2.5 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 that are influenced by projected future interest rates on escrow deposits.

Noninterest Expense of $83.6 million increased $6.4 million, or 8%, primarily reflecting a $4.8 million, or 48%, increase in other expenses and a $4.0 million, or 95%, increase in credit risk transfer premium expense associated with credit default swaps.

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 $19.4 billion in assets and $13.0 billion in deposits as of December 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 Investment Partners, 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.