Executive Summary / Key Takeaways

• Merchants Bancorp ($MBIN) leverages a specialized business model focused on multi-family mortgage banking and mortgage warehousing, driving significant loan volumes and noninterest income, particularly in government-sponsored programs.
• Despite a recent increase in credit loss provisions and charge-offs, primarily in the multi-family portfolio due to property value declines and fraud investigations, the company maintains robust liquidity and capital levels, exceeding regulatory "well capitalized" thresholds.
• The company's strategic use of credit protection arrangements, such as credit default swaps, and its asset-sensitive balance sheet with 96% of loans repricing within three months, are key mitigants against market and credit risks.
• Strong core deposit growth, reaching 92% of total deposits, has significantly reduced reliance on brokered deposits and enhanced funding stability.
• While near-term earnings have been impacted by higher provision expenses and operational investments, the long-term outlook is supported by sustained high business volumes in its core segments and a strategic focus on innovative liquidity solutions and risk management.

A Specialized Approach to Banking Excellence

Merchants Bancorp ($MBIN), established in 1990, has carved out a distinctive position in the financial services industry as a diversified bank holding company. Headquartered in Carmel, Indiana, the company's overarching strategy centers on an "originate to sell" model for low-risk multi-family, residential, and SBA loans, complemented by retaining adjustable-rate loans for investment to mitigate interest rate risk. This specialized approach, particularly in government-sponsored mortgage programs, underpins its foundational strength and differentiates it within a competitive landscape dominated by larger, more generalized institutions.

The company's business model is designed to generate both net interest income and substantial noninterest income from the sale of these low-risk assets. This combination is believed to result in lower-than-industry charge-offs and a more efficient expense base, ultimately aiming to maximize net income and deliver superior shareholder returns. Its three primary segments—Multi-family Mortgage Banking, Mortgage Warehousing, and Banking—operate with synergistic relationships, where the Banking segment often funds loans for Merchants Capital Corporation (MCC) and Merchants Capital Servicing (MCS), and provides Ginnie Mae custodial services. Low-income housing tax credit (LIHTC) syndication and debt fund offerings further complement its multi-family lending activities.

Technological Edge and Risk Mitigation Strategies

Merchants Bancorp's operational efficiency and risk management are significantly bolstered by its specialized platforms and strategic financial instruments. While not a traditional "tech company," its application of sophisticated financial engineering and robust internal systems acts as a technological differentiator in its niche markets. The company's ability to execute complex securitization transactions, such as the Freddie Mac-sponsored Q-Series transaction, highlights its expertise in leveraging structured finance to manage risk and generate noninterest income. This capability allows for the efficient packaging and sale of loans, providing liquidity and capital flexibility.

Furthermore, MBIN employs advanced credit risk management tools, including credit default swaps (CDS) and credit linked notes. These instruments act as a form of "technology" for risk transfer, providing credit protection for substantial loan pools. For instance, in September 2025, the company executed a CDS on a $557.10 million pool of healthcare mortgage loans specifically "to provide credit protection for the loan pool and reduce risk-based capital requirements." Since 2023, these arrangements have addressed $4.2 billion in loans, offering coverage ranging from 13% to 15% of unpaid principal balances. This proactive approach to credit risk transfer, while not offsetting the Allowance for Credit Losses (ACL-Loans) on the balance sheet, significantly reduces the company's exposure to potential losses and optimizes its risk-based capital. The company's internal systems for evaluating and managing these complex derivatives, along with its interest rate risk modeling (NII at Risk and EVE), demonstrate a commitment to sophisticated financial management.

Competitive Landscape and Market Positioning

Merchants Bancorp operates as a specialized regional player, distinguishing itself from larger, diversified financial institutions like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), as well as regional peers such as PNC Financial Services Group (PNC). While these larger banks offer a broader array of services and benefit from immense scale and extensive digital platforms, MBIN's strength lies in its deep expertise and tailored solutions within its core segments. For example, its multi-family mortgage banking segment is recognized as one of the top-ranked agency affordable lenders in the nation and one of the largest Ginnie Mae servicers. This specialization allows MBIN to build strong, niche-specific customer relationships and potentially achieve higher margins in these targeted areas.

In the Mortgage Warehousing segment, MBIN has demonstrated exceptional growth, with loan volumes funded increasing by 33% for the three months and 42% for the nine months ended September 30, 2025, significantly outpacing the estimated 20% industry increase in single-family residential loan volumes. This outperformance is partly attributed to "increased sales efforts and market exits or reductions by competitors," indicating MBIN's ability to capitalize on market dislocations. While larger competitors may have superior technological infrastructure for broad retail banking, MBIN's focused investment in its specialized lending platforms and risk management tools provides a competitive edge in its chosen niches. However, MBIN's smaller scale may lead to higher operational costs in some areas and potential lags in broader digital innovation compared to its larger rivals. The rise of fintech companies also presents an indirect competitive threat, particularly in digital lending solutions, which could impact MBIN's market share if it does not continuously enhance its digital offerings.

Strategic Evolution and Recent Performance

Merchants Bancorp's history reflects a strategic evolution aimed at strengthening its capital base and refining its operational focus. Significant capital raises through preferred stock offerings from 2019 to 2024, alongside a common stock offering in May 2024, underscore a commitment to funding growth. A notable operational streamlining occurred in January 2024 with the consolidation of FMBI into Merchants Bank.

For the three months ended September 30, 2025, net income was $54.70 million, an 11% decrease compared to the same period in 2024, but a 30.5% increase from the second quarter of 2025. Diluted earnings per common share followed a similar trend, decreasing 17% year-over-year to $0.97 but rising 62% quarter-over-quarter. Tangible book value per common share reached a record $36.31, up 12% from the prior year.

The net interest margin for the third quarter of 2025 was 2.82%, down from 2.99% in the prior year, impacted by a shift in business mix towards lower-margin warehouse loans and a contraction in higher-margin healthcare financing. Noninterest income, however, surged by 157% year-over-year to $43.01 million, driven by a 629% increase in loan servicing fees, a 47% rise in gain on sale of loans (including a $237 million multi-family securitization), and a 165% increase in syndication and asset management fees. This strong noninterest income performance was partially offset by a 26% increase in noninterest expense to $77.25 million, primarily due to higher salaries and employee benefits, increased credit risk transfer premiums, and legal fees for collateral preservation. These expenses had a negative 584 basis point impact on the efficiency ratio for the quarter.

Segmental Contributions and Outlook

The Multi-family Mortgage Banking segment reported a 50% increase in net income for the third quarter of 2025 to $12.08 million, driven by higher loan servicing fees and syndication fees. Despite a 27% decrease in net income for the nine months ended September 30, 2025, due to increased noninterest expenses, the segment's loan origination and acquisition volume grew by 16% to $4.40 billion for the nine-month period.

The Mortgage Warehousing segment saw its net income rise by 48% to $23.56 million in the third quarter of 2025, and by 6% to $61.95 million for the nine months ended September 30, 2025. This growth was fueled by a substantial increase in loan funding volume, reaching $45.60 billion for the nine-month period. The Banking segment, however, experienced a 34% decrease in net income for the third quarter of 2025 to $29.55 million, primarily due to an increase in the provision for credit losses.

Management's outlook emphasizes continued focus on maintaining strong liquidity, managing credit risk, and leveraging core business strengths. The company anticipates sustainable performance by capitalizing on market opportunities, supported by its strong capital position and strategic initiatives.

Liquidity and Capital Resilience

Merchants Bancorp demonstrates robust liquidity and capital resources. As of September 30, 2025, the company boasted $5.9 billion in unused borrowing capacity with the Federal Home Loan Bank (FHLB) and the Federal Reserve discount window, a 37% increase from December 31, 2024. This substantial liquidity, coupled with $12.6 billion in highly liquid assets (65% of total assets), provides significant flexibility in managing interest expense and asset levels.

Core deposits have been a key strength, increasing by $3.4 billion, or 36%, to $12.8 billion at September 30, 2025, representing 92% of total deposits—the highest level since March 2022. This growth, driven by custodial deposits from warehouse customers and innovative liquidity solutions, has allowed for a 55% reduction in brokered deposits to $1.1 billion. Total borrowings decreased by $1.5 billion, or 34%, to $2.9 billion, further reflecting improved funding stability. The company and Merchants Bank consistently meet all capital adequacy requirements, maintaining a "well capitalized" status from federal banking agencies. A $500 million shelf registration statement, declared effective in June 2025, provides additional capacity to finance future growth objectives.

Credit Quality and Risk Management

Despite its strengths, Merchants Bancorp has faced credit quality challenges, particularly in its multi-family loan portfolio. The allowance for credit losses on loans increased by 11% to $93.30 million at September 30, 2025, primarily due to declines in multi-family property values following new appraisals and ongoing investigations into mortgage fraud. Charge-offs, largely related to the multi-family portfolio, totaled $86.10 million for the nine months ended September 30, 2025. Nonperforming loans also increased, primarily due to one multi-family relationship.

In response, the company has strategically deployed credit protection arrangements, including credit linked notes and credit default swaps, to mitigate risk. These arrangements, which initially covered $4.2 billion in loans, now apply to $2.4 billion of loans as of September 30, 2025. Additionally, the Bank entered into a confidential Memorandum of Understanding (MOU) with the FDIC and DFI in June 2025, agreeing to maintain specific capital thresholds, manage asset concentrations, and implement risk mitigation plans. Management does not anticipate a material adverse impact on financial performance from these regulatory actions, though they may influence expansion plans. The company's asset-sensitive balance sheet, with approximately 96% of loans repricing within three months, also serves to reduce interest rate risk.

Conclusion

Merchants Bancorp stands as a compelling investment case, rooted in its specialized and synergistic business model that capitalizes on niche lending markets, particularly in multi-family mortgage banking and mortgage warehousing. While recent credit quality challenges, notably in the multi-family sector, have impacted near-term earnings, the company's robust liquidity, strong core deposit growth, and proactive risk mitigation strategies, including sophisticated credit protection arrangements, underscore its resilience. The strategic focus on high-volume, government-sponsored loan origination, coupled with a disciplined approach to capital management, positions MBIN to leverage its technological expertise in structured finance and risk transfer to drive long-term value. Investors should monitor the effectiveness of its credit risk management initiatives and its ability to sustain growth in its specialized segments amidst evolving competitive dynamics and broader industry trends, such as the increasing demand for infrastructure financing driven by AI.