Merchants Bancorp Reports Third Quarter 2025 Results

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Asset quality trends improved, with lower provision expenses and reduced criticized assets during the quarter. Combined with strong liquidity, core deposit growth, and effective capital management, we are confident in our ability to deliver sustainable performance and capitalize on additional market opportunities. These actions reinforce our commitment to long-term stability and shareholder value."

Net income of $54.7 million for the third quarter of 2025 increased by $16.7 million, or 44%, compared to the second quarter of 2025.  The improvement was primarily driven by a $23.1 million, or 31%, increase in net interest income after provision for credit losses, reflecting lower provision expenses.  The increase was partially offset by a $7.5 million, or 15%, decrease in noninterest income driven by lower other income as well as syndication and asset management fees. 

Net income of $54.7 million for the third quarter of 2025 decreased by $6.6 million, or 11%, compared to the third quarter of 2024. The decline was primarily driven by a $27.1 million, or 22%, decrease in net interest income after provision for credit losses, reflecting higher provision expenses. This decline was nearly offset by a $26.3 million, or 157%, increase in noninterest income, driven by growth in gains on loan sales and loan servicing fees.  Results also reflected a $15.9 million, or 26%, increase in noninterest expense, largely attributable to higher salaries and employee benefits, and a $10.2 million, or 51%, decrease in the provision for income taxes, which benefited from the utilization of tax credits.

Total Assets
Total assets of $19.4 billion at September 30, 2025 increased by $213.4 million, or 1%, compared to June 30, 2025, and $548.9 million, or 3%, compared to December 31, 2024. The increase compared to December 31, 2024 was primarily due to higher balances in the warehouse portfolios, which were partially offset by lower balances in the residential loan portfolio. The warehouse portfolio is exclusively made up of loans to residential and multi-family mortgage bankers that are funding agency-eligible mortgages and commercial loans, which represent all of the Company's loans to non-depository financial institutions.

Return on average assets was 1.16% for the third quarter of 2025 compared to 1.34% for the third quarter of 2024 and 0.80% for the second quarter of 2025. 

Asset Quality
The allowance for credit losses on loans of $93.3 million, as of September 30, 2025, increased by $1.5 million, or 2%, compared to June 30, 2025, and increased by $8.9 million, or 11%, compared to December 31, 2024.  The $1.5 million increase compared to June 30, 2025 was driven by $31.0 million in provision for credit losses on loans, which was partially offset by $29.5 million in loan charge-offs. The $31.0 million provision for credit losses on loans for the third quarter of 2025 declined 43% compared to $54.5 million during the second quarter of 2025.

The provision expense and charge-offs for both periods were primarily associated with declines on multi-family property values after receiving new appraisals and the ongoing investigation of borrowers involved in mortgage fraud or suspected fraud. 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 provision for credit losses as specific reserves or charged off.

The Company recorded charge-offs for nine relationships, primarily in the multi-family loan portfolio, totaling $29.5 million, and $23,000 in recoveries during the third quarter of 2025.   This compares to $2.1 million in charge-offs and $7,000 in recoveries during the third quarter of 2024 and $46.1 million in charge-offs and no recoveries in the second quarter of 2025.

Loans receivable classified as special mention declined by 9% compared to June 30, 2025, falling to $155.7 million.  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.  Overall, criticized loans receivable of $582.2 million declined by 1% compared to June 30, 2025.

As of September 30, 2025, all substandard loans have been evaluated for impairment and these loans have specific reserves of $31.1 million, of which $0.3 million was added during the third quarter of 2025, net of charge-offs.  The Company believes that the remaining loan portfolio remains well collateralized.

Non-performing loans increased during the quarter, primarily attributable to one multi-family relationship that was partially offset by charge-offs.  As of September 30, 2025, non-performing loans were $298.3 million, or 2.81% of loans receivable, compared to $251.5 million, or 2.39%, as of June 30, 2025, and $279.7 million, or 2.68%, as of December 31, 2024.  This same relationship drove the $57.2 million increase in total delinquent loans from $279.0 million as of June 30, 2025, to $336.2 as of September 30, 2025.  Of the $336.2 million in delinquent loans, $45.7 million are partially protected under credit risk transfer transactions.

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 a credit linked note and credit default swaps. At their inception, these credit protection arrangements addressed $4.2 billion in loans 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 also continues to carry an allowance for credit losses on loans held for investment. As of September 30, 2025, the balance of loans subject to credit protection arrangements was $2.4 billion.

Total Deposits
Total deposits of $13.9 billion at September 30, 2025 increased by $1.2 billion, or 10%, compared to June 30, 2025, and increased by $2.0 billion, or 17%, compared to December 31, 2024. The increase compared to both periods was primarily due to growth in core demand deposits.  

Core deposits of $12.8 billion at September 30, 2025 increased by $1.4 billion, or 12%, from June 30, 2025 and increased by $3.4 billion, or 36%, from December 31, 2024. The increases were attributable primarily to growth in custodial deposits from warehouse customers as well as strategic initiatives focused on delivering innovative liquidity solutions in expanded markets. Core deposits represented 92% of total deposits at September 30, 2025, 90% of total deposits at June 30, 2025, and 79% of total deposits at December 31, 2024.

Total brokered deposits of $1.1 billion at September 30, 2025 decreased $110.4 million, or 9%, from June 30, 2025 and decreased $1.4 billion, or 55%, from December 31, 2024.   As of September 30, 2025, brokered certificates of deposit had a weighted average remaining duration of 49 days.

Liquidity
Cash balances of $598.0 million as of September 30, 2025 decreased by $49.1 million, or 8%, compared to June 30, 2025 and increased by $121.4 million, or 25%, compared to December 31, 2024.  The Company continues to have significant borrowing capacity available, with unused lines of credit totaling $5.9 billion as of September 30, 2025 compared to $5.0 billion at June 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 $5.9 billion described above, these totaled $12.6 billion, or 65%, of its $19.4 billion total assets at September 30, 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

September 30, 2025 and 2024

Net Interest Income of $128.1 million decreased 4% compared to $132.8 million, reflecting lower interest income partially offset by lower interest expense on deposits and borrowings.

• Net interest margin of 2.82% decreased 17 basis points compared to 2.99%. The margin was negatively impacted by a significant shift in business mix, as highly profitable but lower-margin loans held for sale balances, consisting of primarily warehouse loans, grew by $321.1 million, or 8%, and warehouse repurchase agreements grew by $432.5 million, or 36%, while other higher-margin loans receivable balances contracted by a net of $170.3 million.
• Interest rate spread of 2.33% decreased 10 basis points compared to 2.43%.

Interest Income of $301.8 million decreased $37.1 million, or 11%, compared to $338.9 million. The decrease primarily reflected lower average yields on loans and loans held for sale, primarily in the warehouse portfolios.

• Average yields on loans and loans held for sale of 6.88% decreased 103 basis points compared to 7.91%.

Interest Expense of $173.7 million decreased $32.4 million, or 16%, compared to $206.1 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.

• Average balances of $2.2 billion for certificates of deposit decreased by $2.8 billion, or 56%, compared to $5.0 billion.
• Average interest rates of 4.57% for certificates of deposit decreased by 90 basis points compared to 5.47%.
• Average balances on interest-bearing checking accounts of $7.5 billion increased by $2.2 billion, or 41%, compared to $5.3 billion.
• Average interest rates on interest-bearing checking accounts of 4.02% decreased by 68 basis points compared to 4.70%.

Noninterest Income of $43.0 million increased $26.3 million, or 157%, compared to $16.7 million. The $26.3 million increase reflected a $9.5 million, or 629%, increase in loan servicing fees, a $7.9 million, or 47%, increase in gain on sale of loans, a $5.7 million, or 294%, increase in other income, and a $3.0 million, or 165%, increase in syndication and asset management fees.    

• Loan servicing fees included a $2.1 million positive fair market value adjustment to servicing rights, with a $394,000 negative adjustment in the Banking segment and a $2.5 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 that are influenced by projected future interest rates on escrow deposits.
• Gain on sale of loans increased $7.9 million, or 47%, reflecting higher secondary market sales in the multi-family loan portfolio, including a securitization through a Freddie Mac-sponsored Q-Series transaction.
• Other income included a $770,000 negative fair market value adjustment to the floor derivatives compared to a $7.7 million negative fair market value adjustment in the prior period.

Noninterest Expense of $77.3 million increased 26% compared to $61.3 million, primarily due to a $8.9 million, or 25%, increase in salaries and employee benefits that primarily reflected higher commissions on higher production volume and noninterest income, as well as $2.0 million for expenses associated with the addition of production staff, which is expected to continue to elevate production, gain on sale, and expenses in future quarters.  Also contributing to the higher expenses during the quarter was a $3.6 million increase in other expenses primarily associated with taxes, insurance, property expenses, and legal fees for collateral preservation of nonperforming loans and a $2.1 million increase in credit risk transfer premium expense associated with credit default swaps.

Comparison of Operating Results for the Three Months Ended

September 30, 2025 and June 30, 2025

Net Interest Income of $128.1 million remained essentially unchanged.

• Net interest margin of 2.82% decreased 1 basis points compared to 2.83%.
• Interest rate spread of 2.33% was unchanged.

Interest Income of $301.8 million decreased $2.6 million, or 1%, compared to $304.4 million, primarily reflecting a decrease in average balances on loans and loans held for sale, as well as lower average balances on securities held to maturity.

• Average balances of $14.7 billion for loans and loans held for sale decreased $171.6 million, or 1% compared to $14.8 billion.
• Average balances of $1.5 billion for securities held to maturity decreased $61.3 million, or 4%, compared to $1.6 billion.

Interest Expense of $173.7 million decreased $2.0 million, or 1% compared to $175.7 million. The decrease was primarily driven by lower average balances on borrowings and certificates of deposit, partially offset by higher average balances on interest-bearing checking accounts.  

• Average balances of $2.5 billion for borrowings decreased $977.6 million, or 28%, compared to $3.5 billion.
• Average balances of $2.2 billion for certificates of deposit decreased $851.8 million, or 28%, compared to $3.1 billion.
• Average balances of $7.5 billion for interest-bearing checking accounts increased $1.3 billion, or 21%, compared to $6.2 billion.

Noninterest Income of $43.0 million decreased $7.5 million, or 15%, compared to $50.5 million. The decrease was primarily due to a $5.5 million, or 59%, decrease other income and a $4.8 million, or 50%, decrease in syndication and asset management fees, partially offset by a $1.8 million, or 30%, increase in loan servicing fees and a $1.3 million, or 6%, increase in gain on sale of loans.

• Other income included a $770,000 negative fair market value adjustment to floor derivatives compared to a $4.3 million positive fair market value adjustment to derivatives in the prior period.
• Loan servicing fees included a $2.1 million positive fair market value adjustment to servicing rights, with a $394,000 negative adjustment in the Banking segment and a $2.5 million positive adjustment in the Multi-family Mortgage Banking segment. This compared to a $258,000 positive fair market value adjustment to servicing rights in the prior period, with a $487,000 negative adjustment in the Banking segment and a $745,000 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.
• Gain on sale of loans increased $1.3 million, or 6%, reflecting higher secondary market sales in the multi-family loan portfolio, including a securitization through a Freddie Mac-sponsored Q-Series transaction.

Noninterest Expense of $77.3 million remained essentially unchanged, primarily reflecting a $2.8 million decrease in other expenses primarily associated with taxes, insurance, receiver expenses, and legal fees for the collateral preservation of nonperforming loans, partially offset by a $2.2 million increase in deposit insurance expenses due to elevated levels of criticized and underperforming assets.

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 $13.9 billion in deposits as of September 30, 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.