10-K: Merchants Bancorp 2025 Annual Report: Net Income Declines Amid Credit Loss Surge

Merchants Bancorp reported a 32% decrease in net income for 2025, driven by a significant increase in provision for credit losses and higher noninterest expenses, despite growth in assets and core deposits.

Summary

• Total assets reached $19.4 billion, a 3% increase from December 31, 2024.
• Tangible book value per common share increased 10% to $37.51.
• Asset quality improved with criticized loans receivable decreasing 27% to $508.2 million.
• Unused borrowing capacity with the Federal Home Loan Bank (FHLB) and Federal Reserve Discount Window increased 23% to $5.3 billion.
• Loans receivable, net of allowance for credit losses, grew 6% to $11.0 billion.
• Approximately 96% of loans reprice within three months, reducing interest rate risk.
• Core deposits increased 20% to $11.3 billion, now representing 87% of total deposits.
• Brokered deposits decreased 31% to $1.8 billion.
• Net income decreased 32% to $218.8 million.
• Diluted earnings per share decreased 40% to $3.78.
• Provision for credit losses increased 385% to $117.8 million.
• Noninterest expense increased 34% to $299.9 million.
• Net interest income decreased 1% to $517.1 million.
• Gain on sale of loans increased 37% to $85.4 million.
• Net interest margin was 2.86%, down from 3.03% in 2024.
• Efficiency ratio increased to 44.01% from 33.37% in 2024.
• The Low-Income Housing Tax Credit (LIHTC) syndications business raised $700.7 million in equity in 2025, totaling $2.8 billion since 2020.
• Completed $373.3 million, $237.0 million, and $172.8 million multi-family mortgage loan securitizations through Freddie Mac-sponsored Q-Series transactions in June, July, and December 2025, respectively.
• Executed a credit default swap on a $557.1 million pool of healthcare mortgage loans in September 2025.
• Fully repaid credit-linked notes issued in March 2023 in December 2025, releasing $33.5 million restricted cash collateral and reducing borrowing balances by $87.6 million.
• The volume of warehouse loans funded increased 46% to $66.3 billion in 2025.
• Multi-family loan originations and acquisitions increased 4% to $6.5 billion.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a mixed report with significant headwinds from increased credit losses and expenses impacting profitability, despite strong asset and core deposit growth. The regulatory MOU and ongoing fraud investigations add a layer of uncertainty.

Positives

• Total assets grew 3% to $19.4 billion, reaching a new company milestone.
• Tangible book value per common share increased 10% to $37.51.
• Asset quality improved with criticized loans receivable decreasing 27% to $508.2 million.
• Unused borrowing capacity increased 23% to $5.3 billion, enhancing liquidity.
• Loans receivable, net of allowance for credit losses, grew 6% to $11.0 billion.
• Approximately 96% of loans reprice within three months, mitigating interest rate risk.
• Core deposits increased 20% to $11.3 billion, now 87% of total deposits, reducing reliance on more expensive funding.
• Brokered deposits decreased 31% to $1.8 billion, indicating a shift to more stable funding.
• Gain on sale of loans increased 37% to $85.4 million, reflecting successful execution in the multi-family business.
• The LIHTC syndications business raised $700.7 million in equity in 2025, demonstrating strong capital raising capability in this segment.
• Successful securitizations of multi-family mortgage loans ($373.3 million, $237.0 million, $172.8 million) and a credit default swap ($557.1 million) were executed to manage capital and credit risk.
• Full repayment of credit-linked notes in December 2025, releasing $33.5 million in restricted cash.
• Warehouse loans funded increased 46% to $66.3 billion, significantly outpacing the industry average.
• Multi-family loan originations and acquisitions increased 4% to $6.5 billion.
• Merchants Bank was categorized as 'well capitalized' by the FDIC and Federal Reserve as of December 31, 2025.
• The employee turnover rate in 2025 was only 8%, indicating strong employee relations.
• Named a Top Workplace by The Indianapolis Star from 2023 to 2026 and Top Workplaces USA in 2024-2026.
• The Board declared a quarterly dividend of $0.11 per share for Q1 2026, an increase from $0.10 per share in 2025.

Negatives

• Net income decreased 32% to $218.8 million.
• Diluted earnings per share decreased 40% to $3.78.
• Provision for credit losses increased 385% to $117.8 million, primarily due to declines in multi-family property values and mortgage fraud investigations.
• Noninterest expense increased 34% to $299.9 million, driven by salaries, collateral preservation, and credit risk transfer premiums.
• Net interest income decreased 1% to $517.1 million.
• Net interest margin decreased to 2.86% from 3.03% in 2024.
• Efficiency ratio increased to 44.01% from 33.37% in 2024, with credit-related expenses and new staff negatively impacting it by 680 basis points.
• Loan servicing fees decreased 49% to $22.4 million, primarily due to lower positive fair value adjustments on servicing rights.
• Other real estate owned (OREO) increased significantly by $51.9 million to $60.1 million, mainly due to one multi-family property moving to OREO.
• Cash and cash equivalents decreased 55% to $212.2 million due to intentional cash management.
• A default occurred on an $11.5 million loan modified due to financial difficulties within the previous twelve months.
• Approximately 70% of 2025 charge-offs ($124.1 million total) were associated with five relationships.
• The Memorandum of Understanding (MOU) with FDIC and IDFI, while met, may limit or delay expansion plans.

Risks

• Decreased residential and multi-family mortgage origination, volume and pricing decisions of competitors, and changes in interest rates may adversely affect profitability.
• Dependence on an active secondary market and eligibility for agency programs (Fannie Mae, Freddie Mac, Ginnie Mae) for mortgage loan sales.
• Violations of HUD requirements could lead to monetary penalties, indemnification claims, or ineligibility for FHA programs.
• Real estate construction loans involve risks of inaccurate cost/value estimates and potential significant losses if projects fail or market values decline.
• Strong competition from various financial institutions, including national banks, regional banks, credit unions, online banks, and financial technology (FinTech) companies.
• Federal government shutdowns or budget changes could adversely affect the multi-family FHA origination business.
• Inability to maintain the company's reputation could materially adversely affect business and stock value.
• A decline in general business and economic conditions and any regulatory responses could have a material adverse effect on business, financial position, results of operations, and growth prospects.
• Ineffective management of credit risk may lead to increased levels of delinquencies, nonperforming loans, and charge-offs, requiring higher provisions for credit losses.
• Nonperforming assets take significant time to resolve and adversely affect results of operations and financial condition.
• The Allowance for Credit Losses on Loans (ACL-Loans) may prove to be insufficient to absorb potential losses in the loan portfolio.
• Small to midsized businesses, which the company lends to, may have fewer resources to weather adverse business developments, impairing their ability to repay loans.
• Dependence on the accuracy and completeness of information provided by customers and counterparties, with reliance on misleading, false, inaccurate, or fraudulent information potentially leading to negative financial and reputational impacts.
• If the goodwill recorded in connection with a business acquisition becomes impaired, it could require charges to earnings.
• Changes in accounting standards could materially impact financial statements, potentially requiring retrospective application or restatements.
• Failure to maintain effective internal controls over financial reporting could have a material adverse effect on business and stock price.
• The accuracy of financial statements and related disclosures could be affected if judgments, assumptions, or estimates used in critical accounting policies are inaccurate.
• Downgrades to the credit rating of the U.S. government or its agencies could have a material adverse effect on general economic conditions and the company's business.
• Downgrades to the company's or its subsidiaries' credit rating could increase the cost of or ability to raise additional capital.
• The risk management framework may not be effective in mitigating all risks and/or losses.
• High dependence on the management team, and the loss of senior executive officers or other key employees could harm the ability to implement the strategic plan and impair customer relationships.
• Management's dependence on data and modeling in decision-making, where faulty data or flawed approaches could negatively impact decisions or lead to regulatory scrutiny.
• System failures or breaches of network security could subject the company to increased operating costs, litigation, and other liabilities.
• Adoption of Artificial Intelligence (AI) may present significant challenges relating to compliance risk, credit risk, reputation risk, and operational risk.
• Operations could be interrupted if third-party service providers experience difficulty, terminate their services, or fail to comply with banking regulations.
• A continuing need for technological change, and the risk of not having resources to effectively implement new technology or experiencing operational challenges.
• Operational risks, including customer or employee fraud and data processing system failures and errors.
• Inability to overcome the integration and other risks associated with acquisitions could have an adverse effect on the ability to implement the business strategy.
• Certain directors and executive officers and their immediate families beneficially own approximately 57% of outstanding common stock, allowing them to substantially influence shareholder approval matters.
• Operations could be adversely affected by extraordinary events beyond control, such as natural disasters, pandemics, or civil unrest.
• Fluctuations in interest rates may reduce net interest income and otherwise negatively impact financial condition and results of operations.
• Negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing real estate loans and result in loan and other losses.
• Liquidity risks, including an inability to raise funds through deposits, borrowings, or asset sales, could have a substantial negative effect on liquidity.
• Concentration of a significant portion of total deposits in large mortgage non-depository financial institutions exposes the company to withdrawal risk.
• Brokered deposits may be more rate sensitive and may not be replaced as they mature, adversely affecting liquidity.
• Breach of representations or warranties made to a purchaser of mortgage loans may result in liability for costs and damages, including repurchase obligations.
• The soundness of other financial institutions could adversely affect the ability to engage in routine funding transactions.
• The need to raise additional capital in the future, and failure to maintain sufficient capital, could adversely affect financial condition, liquidity, and regulatory compliance.
• Legislative and regulatory actions, including the Dodd-Frank Act and potential Basel III Endgame revisions, may increase costs and impact business.
• Heightened regulatory requirements and scrutiny due to exceeding $10 billion in assets.
• Failure to meet stringent capital requirements could limit activities, including growth initiatives.
• Monetary policies and regulations of the Federal Reserve could adversely affect business, financial condition, and results of operations.
• Regulatory examinations by the Federal Reserve, FDIC, IDFI, Fannie Mae, Freddie Mac, FHA, USDA, and Ginnie Mae could result in remedial actions or sanctions.
• Noncompliance with consumer protection laws, including the CRA and fair lending laws, could lead to sanctions and directives.
• Subject to a complex set of laws relating to processing and safeguarding personal information, with failure to comply potentially resulting in financial losses and reputational harm.
• Risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
• The Federal Reserve may require the company to commit capital resources to support Merchants Bank under the source of strength doctrine.

Future Outlook

The Mortgage Bankers Association (MBA) projects a gradual rebound in single-family residential mortgage activity, with total originations increasing approximately 7% in 2026, reflecting 6% purchase growth and 10% refinance growth. The MBA also expects 30-year mortgage rates to remain in the 6%-6.5% range and the 10-year Treasury to stay above 4% through 2026. Management anticipates lower overall provision for credit losses in 2026 due to a reduction in identified impairments on problem loans, despite expected loan growth. The company expects to continue incurring increased noninterest expense attributable to general and administrative expenses related to building out and modernizing operational infrastructure, marketing, strategic initiatives, and hiring additional personnel. The Board expects to raise its common stock dividend in 2026, having declared $0.11 per share for Q1 2026. The current administration expects to propose revisions to Basel III Endgame at some point in 2026. The Memorandum of Understanding (MOU) with FDIC and IDFI, while currently met, may have the effect of limiting or delaying the Company's or Merchants Bank's ability or plans to expand.

Management Comments

• "We have primarily grown organically and strategically built our business model in a way that we believe offers insulation from cyclical economic and credit swings and provides synergies across our lines of business."
• "We believe that the combination of net interest income based on short duration assets and liabilities and noninterest income from the sale of low risk profile assets has traditionally resulted in lower than industry charge-offs and a lower expense base, which serves to maximize net income and higher than industry shareholder return."
• "Management does not expect the actions called for by these regulatory actions [MOU] to have a material adverse impact on the Company’s financial performance or Merchants Bank’s ongoing day-to-day operations, although they may have the effect of limiting or delaying the Company’s or Merchants Bank’s ability or plans to expand."
• "We expect loan growth to continue in 2026; however, we anticipate lower overall provision for credit losses due to a reduction in identified impairments on problem loans."
• "The Company continues to monitor the situation and may need to adjust future expectations as developments occur [regarding unforeseen future losses]."
• "We expect to continue incurring increased noninterest expense attributable to general and administrative expenses related to building out and modernizing our operational infrastructure, marketing, and other administrative expenses to execute our strategic initiatives, as well as expenses to hire additional personnel and other costs required to continue our growth."
• "Management believes, as of December 31, 2025 and 2024, that the Company and Merchants Bank met all capital adequacy requirements to which they were subject."

Industry Context

StockSavvy.ai notes that Merchants Bancorp's 46% increase in warehouse loans funded significantly outpaced the estimated 22% industry increase in single-family residential loan volumes, according to the Mortgage Bankers Association, indicating strong market share gains in this segment. The broader industry trend of moderating interest rates, as observed by the Federal Reserve's rate cuts in 2025 and MBA's forecast for 2026, is generally supportive of increased origination and refinance volumes, which aligns with the company's growth in warehouse and multi-family lending. The shift towards a more pro-banking regulatory posture, with proposals to relax capital requirements and increased government-sponsored enterprise (GSE) purchasing authority, provides a favorable backdrop for financial institutions like Merchants Bancorp, potentially easing compliance burdens and supporting credit availability. However, regional supply constraints and elevated home prices continue to influence transaction activity, posing ongoing challenges for the housing market.

Comparison to Industry Standards

• Merchants Bancorp's 46% increase in warehouse loans funded to $66.3 billion in 2025 significantly outpaced the Mortgage Bankers Association's estimated 22% industry increase in single-family residential loan volumes for the same period, demonstrating strong outperformance in this segment.
• The company's efficiency ratio of 44.01% in 2025, while higher than its 2024 ratio of 33.37%, is still competitive within the banking industry, especially considering the 680 basis point negative impact from credit default swap premiums, collateral preservation, and new production staff. Many regional banks often operate with efficiency ratios in the 50-60% range.
• The 8% employee turnover rate in 2025 is notably lower than the average for the financial services industry, which often sees rates in the 15-20% range, suggesting strong employee retention and satisfaction.
• Merchants Bancorp's consistent recognition as a 'Best Place to Work in Indiana' (2016-2022) and 'Top Workplaces USA' (2024-2026) highlights its strong corporate culture and employee engagement, which are often benchmarks for industry leadership in human capital management.

Corporate Governance

Legal Proceedings

• There are no material pending legal proceedings other than ordinary routine litigation incidental to the business which we operate.

Related Party Transactions

• Legal Services: Retained a law firm of which a Board member is a partner. Fees paid to the law firm totaled $9.7 million in 2025, $4.0 million in 2024, and $9.4 million in 2023.
• Corporate Travel: Made payments to a company owned by the Chairman and Chief Executive Officer for charter flights as part of corporate travel expenses, totaling $25,000 in 2025, $104,000 in 2024, and $62,000 in 2023.
• Land Sale: Sold certain land to an entity owned by the Chairman and Chief Executive Officer for $2.2 million in cash on December 30, 2025. No gain or loss was recognized.
• Investments in Senior Housing and Healthcare Entity: Holds a 30% ownership in an LLC. Origination fees received from borrowers referred by the LLC were $45.8 million in 2025. Fees paid to the LLC for loans referred and originated were $41.8 million. Servicing income received for loans referred by the LLC was $1.5 million, with $0.9 million paid to the LLC. Income from investment in LLC was $7.1 million. An unfunded commitment of $1.5 million for a standby letter of credit was issued on behalf of this entity as of December 31, 2025.
• Investments in LIHTC Syndications: Serves as a general partner, limited partner, or managing member. Interest income, financing, and other fees received from syndicated funds totaled $35.5 million in 2025. Loans and other receivables outstanding, net of participations sold, to syndicated funds were $323.3 million as of December 31, 2025.
• Investments in Debt Financing Entities: Invested in single-family, multi-family, and healthcare debt financing entities. Income from investments, servicing, interest income, and management of debt funds totaled $52.2 million in 2025. Loans outstanding, net of participations sold, to debt funds were $107.7 million as of December 31, 2025. Loans sold to debt funds totaled $513.0 million in 2025. An unfunded commitment of $20.0 million for a standby letter of credit was issued on behalf of this entity as of December 31, 2025.

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and diluted EPS, which negatively impacts common shareholders. However, the Board declared an increased quarterly dividend for Q1 2026, and tangible book value per share increased. Preferred shareholders received regular dividends.
• Employees: Benefit from positive employee relations, a low 8% turnover rate, and recognition as a 'Top Workplace'. The ESOP and 401(k) contributions provide additional benefits, and the addition of production staff indicates growth opportunities.
• Customers: Continue to be served by a diverse range of banking and financial services. Increased warehouse lending volume supports mortgage bankers, and multi-family and healthcare financing continues. Some multi-family customers may be impacted by declines in property values and mortgage fraud investigations.
• Regulators: Merchants Bank maintains a 'well capitalized' status and is complying with the Memorandum of Understanding (MOU), although the MOU may impose limitations on future expansion. The company is subject to increased regulatory scrutiny due to its asset size.
• Community: The company maintains a strong focus on supporting affordable housing projects through LIHTC syndications and agricultural lending, and has an approved CRA strategic plan through 2028.

Next Steps

• Merchants Bank will continue to operate under an approved CRA strategic plan through 2028.
• The current administration expects to propose revisions to Basel III Endgame at some point in 2026.
• Management anticipates lower overall provision for credit losses in 2026.
• The Board expects to raise its common stock dividend in 2026, having declared $0.11 per share for Q1 2026.
• The Company has a commitment to purchase $19.7 million in tax credits in Q1 2026.
• The Company may redeem Series C Preferred Stock on any dividend payment date on or after April 1, 2026, subject to regulatory approval.
• The Company may redeem Series D Preferred Stock on any dividend payment date on or after October 1, 2027, subject to regulatory approval.
• The Company may redeem Series E Preferred Stock on any dividend payment date on or after January 1, 2030, subject to regulatory approval.
• The FHLB variable-rate debt agreement for $2.0 billion matures on March 16, 2026.
• The FHLB variable-rate debt agreement for $1.8 billion matures on March 31, 2026.
• The MOU will remain in effect until modified or terminated by the FDIC and IDFI.

Key Dates

Recommendation

Merchants Bancorp presents a mixed financial picture. While the company demonstrates strong operational growth in key segments like warehouse lending and multi-family originations, and maintains robust capital ratios, the significant decline in net income and diluted EPS, primarily driven by a substantial increase in provision for credit losses and higher noninterest expenses, is a material concern. The ongoing investigations into mortgage fraud and declines in multi-family property values highlight underlying credit quality issues that warrant caution. The regulatory MOU, while currently met, could also constrain future growth. Given the strong underlying business model and strategic initiatives, but also the clear profitability challenges and credit concerns, a 'hold' recommendation is appropriate for seasoned investors to monitor the effectiveness of management's mitigation strategies and the trajectory of credit quality.

Keywords

Bank Holding Company, Mortgage Banking, Multi-family Housing Finance, Healthcare Facility Finance, Mortgage Warehousing, Low-Income Housing Tax Credits (LIHTC), SBA Lending, Commercial Real Estate, Financial Services, SEC Filing, 10-K, Banking Industry, Credit Risk, Interest Rate Risk, Regulatory Compliance, Capital Adequacy, Deposits, Loans, Securitization, ESG