8-K: Merchants Bancorp Q3 Earnings Rebound on Improved Credit Quality

Merchants Bancorp reported a strong rebound in third-quarter 2025 earnings, driven by improved credit quality and record-high tangible book value, despite a year-over-year net income decrease.

Summary

• Net income for Q3 2025 was $54.7 million, a 44% increase from Q2 2025 ($38.0 million) but an 11% decrease from Q3 2024 ($61.3 million).
• Diluted earnings per common share were $0.97, up 62% from Q2 2025 ($0.60) but down 17% from Q3 2024 ($1.17).
• Total assets reached a record-high of $19.4 billion as of September 30, 2025, increasing 1% from June 30, 2025, and 3% from December 31, 2024.
• Tangible book value per common share hit a record-high of $36.31, a 3% increase from June 30, 2025, and 12% from Q3 2024.
• Core deposits grew by $1.4 billion (12%) from June 30, 2025, to $12.8 billion, now representing 92% of total deposits, the highest since March 2022.
• The total provision for credit losses decreased by 45%, or $23.8 million, compared to Q2 2025.
• Gain on sale of loans increased by $7.9 million (47%) compared to Q3 2024 and $1.3 million (6%) compared to Q2 2025.
• Non-performing loans increased to $298.3 million (2.81% of loans receivable) as of September 30, 2025, from $251.5 million (2.39%) as of June 30, 2025, primarily due to one multi-family relationship.
• Loans receivable classified as special mention decreased by 9% to $155.7 million compared to June 30, 2025.
• Overall criticized loans receivable declined by 1% to $582.2 million compared to June 30, 2025.

Sentiment

Score: 7

Explanation: The company demonstrated a strong rebound in earnings and key financial metrics quarter-over-quarter, with record-high tangible book value and total assets. Significant improvements in core deposit growth and a reduction in brokered deposits indicate a healthier funding profile. While net income and EPS were down year-over-year, and non-performing loans increased due to a specific multi-family relationship, the overall trend in asset quality (lower provision, reduced criticized assets) and strategic risk mitigation efforts (credit default swaps) suggest a positive trajectory and effective management of challenges.

Positives

• Net income increased 44% quarter-over-quarter to $54.7 million.
• Diluted EPS increased 62% quarter-over-quarter to $0.97.
• Tangible book value per common share reached a record-high of $36.31, increasing 12% year-over-year and 3% quarter-over-quarter.
• Total assets reached a record-high of $19.4 billion.
• Core deposits increased by $1.4 billion (12%) quarter-over-quarter to $12.8 billion, now representing 92% of total deposits, the highest level since March 2022.
• Brokered deposits decreased by $110.4 million (9%) quarter-over-quarter and $1.4 billion (55%) year-to-date, improving the deposit mix.
• Provision for credit losses decreased 45% ($23.8 million) quarter-over-quarter.
• Loans receivable classified as special mention declined by 9% to $155.7 million quarter-over-quarter.
• Overall criticized loans receivable declined by 1% to $582.2 million quarter-over-quarter.
• Gain on sale of loans increased $7.9 million (47%) year-over-year and $1.3 million (6%) quarter-over-quarter, highlighting core business resilience.
• Significant unused borrowing capacity of $5.9 billion, representing 30% of total assets, enhancing liquidity.
• Executed a credit default swap on September 17, 2025, on a $557.1 million pool of healthcare mortgage loans to provide credit protection and reduce risk-based capital requirements.
• Capital ratios (Total, Tier I, Common Equity Tier I) all improved quarter-over-quarter and year-over-year, with Total Capital/Risk-Weighted Assets at an estimated 13.6%.

Negatives

• Net income decreased 11% year-over-year to $54.7 million.
• Diluted EPS decreased 17% year-over-year to $0.97.
• Net interest income after provision for credit losses decreased 22% year-over-year, reflecting higher provision expenses compared to the prior year.
• Net interest margin decreased 17 basis points year-over-year to 2.82%, negatively impacted by a significant shift in business mix to lower-margin warehouse loans.
• Noninterest expense increased 26% year-over-year, primarily due to higher salaries, employee benefits, and expenses for production staff additions.
• Non-performing loans increased to $298.3 million (2.81% of loans receivable) as of September 30, 2025, from $251.5 million (2.39%) as of June 30, 2025, primarily due to one multi-family relationship.
• Total delinquent loans increased from $279.0 million as of June 30, 2025, to $336.2 million as of September 30, 2025, driven by the same multi-family relationship.
• Interest income decreased 11% year-over-year, primarily reflecting lower average yields on loans and loans held for sale in warehouse portfolios.

Risks

• Declines in multi-family property values after receiving new appraisals have led to increased provision for credit losses and charge-offs.
• Ongoing investigation of borrowers involved in mortgage fraud or suspected fraud contributes to credit losses.
• Underperforming subordinated loans, which the Company no longer offers, have been largely identified and evaluated for potential losses.
• Increased non-performing loans, primarily attributable to one multi-family relationship, which also drove an increase in total delinquent loans.
• Exposure to interest rate environments, as the value of servicing rights generally increases in rising 10-year interest rate environments and declines in falling interest rate environments.
• Forward-looking statements are subject to risks, assumptions, estimates, and uncertainties that are difficult to predict, including industry, economic, and regulatory factors.

Future Outlook

The Company expects continued elevation in production, gain on sale, and expenses in future quarters due to the addition of production staff. Management believes that the remaining loan portfolio remains well collateralized and is confident in its ability to deliver sustainable performance and capitalize on additional market opportunities, reinforced by strong liquidity, core deposit growth, and effective capital management.

Management Comments

• "We are pleased with the strong rebound in earnings this quarter, driven by improved credit quality and disciplined execution." Michael F. Petrie, Chairman and CEO.
• "We also continued our successful track record of implementing credit risk transfers, including a $557 million healthcare loan pool, which enhances capital efficiency and reduces risk exposure." Michael F. Petrie, Chairman and CEO.
• "In addition, the strong activity in gain on sale of loans this quarter underscores the resilience and strength of our core businesses." Michael F. Petrie, Chairman and CEO.
• "Asset quality trends improved, with lower provision expenses and reduced criticized assets during the quarter." Michael J. Dunlap, President and Chief Operating Officer.
• "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." Michael J. Dunlap, President and Chief Operating Officer.

Industry Context

The company's strategic execution of credit risk transfers, including a $557 million healthcare loan pool, aligns with broader industry trends towards capital efficiency and risk mitigation in a dynamic financial landscape. The growth in core deposits and reduction in brokered deposits reflect a positive trend in deposit gathering strategies, potentially indicating a flight to quality or effective customer acquisition in a competitive banking environment. The increase in non-performing loans, particularly in the multi-family sector, suggests ongoing challenges in certain real estate segments, which is a trend observed across parts of the banking industry amidst fluctuating property values and interest rates.

Stakeholder Impact

• Shareholders: Positive impact from strong quarter-over-quarter earnings rebound, record-high tangible book value per common share, and improved capital ratios. Negative impact from year-over-year decline in net income and EPS.
• Customers (Warehouse): Continued support through warehouse portfolios for residential and multi-family mortgage bankers.
• Customers (Depositors): Benefit from strategic initiatives delivering innovative liquidity solutions and strong core deposit growth.
• Employees: Increased salaries and employee benefits, along with the addition of production staff, indicate growth and investment in human capital.
• Creditors: Improved liquidity and capital ratios, along with credit risk transfer arrangements, enhance the company's financial stability and ability to meet obligations.

Next Steps

• Continue efforts to reduce credit risk through loan sale and securitization activities.
• Monitor and manage underperforming loans, particularly those in the multi-family loan portfolio and those associated with mortgage fraud investigations.
• Leverage credit protection arrangements to reduce risk of losses and enhance capital efficiency.
• Continue strategic initiatives focused on delivering innovative liquidity solutions in expanded markets to drive core deposit growth.
• Elevate production, gain on sale, and manage expenses in future quarters with the addition of production staff.

Key Dates

Recommendation

While Merchants Bancorp demonstrated a strong quarter-over-quarter rebound in earnings, record tangible book value, and improved deposit mix, the year-over-year decline in net income and diluted EPS, coupled with an increase in non-performing loans driven by a single multi-family relationship, presents a mixed picture. The proactive credit risk management and capital strength are positives, but the persistent asset quality issues in specific segments warrant caution. A 'hold' recommendation is appropriate as investors should monitor the resolution of the non-performing loan issues and the sustained impact of strategic initiatives on net interest margin and overall profitability before making a more aggressive move.

Keywords

Merchants Bancorp, MBIN, Financial Results, Third Quarter 2025, Earnings, Net Income, EPS, Tangible Book Value, Credit Quality, Loan Sales, Deposits, Liquidity, Asset Quality, Non-performing Loans, Credit Risk Transfer, Multi-family Mortgage Banking, Mortgage Warehousing, Banking, SEC Filing, 8-K