10-Q: Merchants Bancorp Reports Lower Q1 2025 Earnings Amid Market Uncertainty

Sentiment:

Quarterly Report 9 May 2025 4:05 PM

Merchants Bancorp's Q1 2025 net income declined due to market uncertainty impacting loan origination and net interest margin, despite growth in core deposits and warehouse loan funding.

Delay expectedMarket uncertainty delayed origination closings and permanent loan conversions in a growing pipeline, which negatively impacted the recognition of gain on sale and net interest margin more than expected.

Worse than expectedNet income decreased by $28.8 million, or 33%, compared with the three months ended March 31, 2024.Diluted earnings per share decreased 48% compared to the three months ended March 31, 2024.Net interest margin decreased 25 basis points, to 2.89%, for the three months ended March 31, 2025 compared to 3.14% for the three months ended March 31, 2024.Efficiency ratio was at 42.27% in the three months ended March 31, 2025, compared with 29.13% in the three months ended March 31, 2024.

Summary

Merchants Bancorp reported a net income of $58.2 million for Q1 2025, a decrease of $28.8 million compared to Q1 2024.
Diluted earnings per share decreased by 48% to $0.93.
The decrease in net income was attributed to a $17.2 million decrease in noninterest income, a $12.8 million increase in noninterest expense, a $4.9 million decrease in net interest income, and a $3.0 million increase in provision for credit losses.
Tangible book value per common share increased 19% to $34.90.
Total assets remained relatively stable at $18.8 billion.
Loans receivable decreased slightly to $10.3 billion.
Core deposits increased significantly to $10.7 billion, representing 86% of total deposits.
Brokered deposits decreased to $1.7 billion.
Net interest margin decreased to 2.89% from 3.14% in Q1 2024.
The efficiency ratio increased to 42.27% from 29.13% in Q1 2024.
The company redeemed all outstanding shares of Series B Preferred Stock for $125.0 million.
Warehouse loan funding volume increased by 49% to $11.9 billion.
Multi-family loan origination volume increased by 4% to $934.4 million.
Loans originated and acquired for sale in the secondary market increased 63% to $411.2 million.

Sentiment

Score: 5

Explanation: The report presents mixed results, with some positive aspects like core deposit growth and increased warehouse lending volume, but these are overshadowed by declines in net income, EPS, and net interest margin. The outlook is uncertain, leading to a neutral sentiment.

Positives

Tangible book value per common share increased 19% to $34.90.
Core deposits increased significantly to $10.7 billion, representing 86% of total deposits.
Warehouse loan funding volume increased by 49% to $11.9 billion.
Multi-family loan origination volume increased by 4% to $934.4 million.
Loans originated and acquired for sale in the secondary market increased 63% to $411.2 million.
As of March 31, 2025, the Company had $4.7 billion in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window based on available collateral, compared to $4.3 billion at December 31, 2024.

Negatives

Net income decreased by $28.8 million to $58.2 million in Q1 2025.
Diluted earnings per share fell to $0.93, a 48% decrease.
Net interest margin decreased to 2.89% from 3.14% in Q1 2024.
The efficiency ratio increased to 42.27% from 29.13% in Q1 2024.
Nonperforming loans (nonaccrual and greater than 90 days past due but still accruing) were $284.6 million, or 2.73% of total loans receivable, at March 31, 2025, compared to $279.7 million, or 2.68%, of total loans at December 31, 2024 and $131.8 million, or 1.22%, at March 31, 2024.

Risks

Market uncertainty delayed origination closings and permanent loan conversions.
Higher interest rates negatively impact borrowers' ability to make required payments.
The company's business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.

Future Outlook

The report notes that the addition of production staff is expected to elevate production, gain on sale, and expenses in future quarters.

Management Comments

The $28.8 million decrease in net income compared to the three months ended March 31, 2024, reflecting market uncertainty that delayed origination closings and permanent loan conversions in a growing pipeline, which negatively impacted the recognition of gain on sale and net interest margin more than expected.

Industry Context

The report mentions that the 49% increase in warehouse loan funding volume compares favorably to the 2% industry increase in single-family residential loan volumes for the three months ended March 31, 2025, according to an estimate of industry volume by the Mortgage Bankers Association.

Comparison to Industry Standards

The company's warehouse loan funding volume increased by 49%, significantly outpacing the industry's 2% growth in single-family residential loan volumes, as estimated by the Mortgage Bankers Association.
The company's efficiency ratio of 42.27% is higher than the 29.13% reported in the same period last year, indicating a less efficient operation compared to its own historical performance.
The company's net interest margin decreased to 2.89% from 3.14% in the same period last year, suggesting a compression in profitability compared to its own historical performance.

Stakeholder Impact

Shareholders may be concerned about the decline in net income and EPS.
Employees may be affected by the company's efforts to manage expenses.
Customers may experience changes in loan pricing and availability due to market conditions.

Key Dates

Date	Description
March 28, 2019	Company issued 2,000,000 shares of 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock.
April 12, 2019	Company issued an additional 81,800 shares of Series A Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement.
August 19, 2019	Company issued 5,000,000 depositary shares, each representing a 1/40 th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock.
March 23, 2021	Company issued 6,000,000 depositary shares, each representing a 1/40 th interest in a share of its 6.00% Fixed-to-Floating Rate Series C Non-Cumulative Perpetual Preferred Stock.
May 6, 2021	Company completed a private offering of 46,181 shares (1,847,233 depositary shares) of Series C Preferred Stock.
September 27, 2022	Company issued 5,200,000 depositary shares, each representing a 1/40 th interest in a share of its 8.25% Fixed Rate Reset Series D Non-Cumulative Perpetual Preferred Stock.
September 30, 2022	Company issued an additional 500,000 depositary shares of Series D Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement.
January 26, 2024	Farmers-Merchants Bank of Illinois branch locations were sold.
April 1, 2024	Company redeemed all outstanding shares of the Series A Preferred Stock.
May 13, 2024	Company issued 2,400,000 shares of the Company's common stock in an underwritten public offering.
November 25, 2024	Company issued 9,200,000 depositary shares, each representing a 1/40 th interest in a share of its 7.625% Fixed Rate Reset Series E Non-Cumulative Perpetual Preferred Stock.
January 2, 2025	Company redeemed all outstanding shares of the Series B Preferred Stock.
February 21, 2025	The Company entered into a new variable-rate debt agreement with the FHLB for an advance that has put and call options attached to it.
March 31, 2025	The Company entered into a new variable-rate debt agreement with the FHLB for an advance that has put and call options attached to it.
May 1, 2025	As of this date, 45,881,706 shares of the registrant's common stock were issued and outstanding.
May 9, 2025	Date of signatures for the 10-Q filing.

Keywords

Merchants Bancorp, earnings, net income, deposits, loans, mortgage banking, warehouse lending, capital, ALCO, credit risk, interest rate risk

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