Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2025
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 001-38258
MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
Indiana
20-5747400
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
410 Monon Blvd. Carmel, Indiana
46032
(Address of principal
(Zip Code)
executive office)
(317) 569-7420
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, without par value
MBIN
NASDAQ
Depositary Shares, each representing a 1/40th interest in a share of Series C Preferred Stock, without par value
MBINN
Depositary Shares, each representing a 1/40th interest in a share of Series D Preferred Stock, without par value
MBINM
Depositary Shares, each representing a 1/40th interest in a share of Series E Preferred Stock, without par value
MBINL
As of August 1, 2025, the latest practicable date, 45,885,458 shares of the registrant’s common stock, without par value, were issued and outstanding.
Merchants Bancorp
Index to Quarterly Report on Form 10-Q
PART I – FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2025 and December 31, 2024
5
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2025 and 2024
6
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2025 and 2024
7
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2025 and 2024
8
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2025 and 2024
9
Notes to Condensed Consolidated Financial Statements
10
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
57
Item 3 Quantitative and Qualitative Disclosures About Market Risk
86
Item 4 Controls and Procedures
PART II – OTHER INFORMATION
87
Item 1 Legal Proceedings
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Mine Safety Disclosures
Item 5 Other Information
Item 6 Exhibits
88
SIGNATURES
89
2
Glossary of Defined Terms
As used in this report, references to “Merchants” “the Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Merchants Bancorp and its wholly owned subsidiaries. Merchants Bancorp refers solely to the parent holding company, and Merchants Bank refers to Merchants Bancorp’s bank subsidiary, Merchants Bank of Indiana.
The acronyms and abbreviations identified below are used throughout this report, including the Notes to Consolidated Financial Statements
ACL: allowance for credit losses
ACL-Guarantees: allowance for credit losses on guarantees
ACL-Loans: allowance for credit losses-loans
ACL-OBCE: allowance for credit losses-off-balance sheet credit exposures
AFX: American Financial Exchange
Agency: government agency
AOCL: accumulated other comprehensive loss
ARM: adjustable-rate mortgage
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
Bank: Merchants Bank of Indiana
CCO: Chief Credit Officer
CDS: credit default swap
CMT: constant maturity rate
CODM: chief operating decision maker
Company: Merchants Bancorp
DFI: Indiana Department of Financial Institutions
ESOP: Employee Stock Ownership Plan
Farmer Mac: Federal Agricultural Mortgage Corporation
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FCB: Federal Farm Credit Bank
FDIC: Federal Deposit Insurance Corporation
Federal Reserve: Board of Governors of the Federal Reserve System
FHA: Federal Housing Authority
FHLB: Federal Home Loan Bank
3
FMBI: Farmers-Merchants Bank of Illinois, a wholly owned subsidiary of Merchants Bancorp until all branches were sold and the charter collapsed into Merchants Bank in January 2024
Freddie Mac: Federal Home Loan Mortgage Corporation
GAAP: United States generally accepted accounting principles
Ginnie Mae: Government National Mortgage Association
GSE: government sponsored entities, including Fannie Mae and Freddie Mac
HUD: Department of Housing and Urban Development
LIHTC: low-income housing tax credits
LLC: limited liability companies
MAM: Merchants Asset Management, LLC, a wholly owned subsidiary of Merchants Bancorp
MCC: Merchants Capital Corporation, a wholly owned subsidiary of Merchants Bank
MCI: Merchants Capital Investments, LLC, a wholly owned subsidiary of Merchants Bank
MCS: Merchants Capital Servicing, LLC, a wholly owned subsidiary of Merchants Bank
MOU: Memorandum of Understanding
N/A: not applicable
NASDAQ: NASDAQ Capital Market
REMIC: real estate mortgage investment conduit
ROU: right of use
SBA: Small Business Administration
SEC: Securities and Exchange Commission
SOFR: Secured Overnight Financing Rate
SPE: Special Purpose Entity
Treasury: US Department of Treasury
TLM: troubled loan modification
VIE: variable interest entity
4
Part I – Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2025 (Unaudited) and December 31, 2024
(In thousands, except share data)
June 30,
December 31,
2025
2024*
Assets
Cash and due from banks
$
15,419
10,989
Interest-earning demand accounts
631,746
465,621
Cash and cash equivalents
647,165
476,610
Securities purchased under agreements to resell
1,539
1,559
Mortgage loans in process of securitization
402,427
428,206
Securities available for sale ($602,962 and $635,946 utilizing fair value option, respectively)
936,343
980,050
Securities held to maturity ($1,547,525 and $1,664,674 at fair value, respectively)
1,548,211
1,664,686
Federal Home Loan Bank (FHLB) stock and other equity securities
217,850
217,804
Loans held for sale (includes $91,930 and $78,170 at fair value, respectively)
4,105,765
3,771,510
Loans receivable, net of allowance for credit losses on loans of $91,811 and $84,386, respectively
10,432,117
10,354,002
Premises and equipment, net
71,050
58,617
Servicing rights
193,037
189,935
Interest receivable
82,391
83,409
Goodwill
8,014
Other assets and receivables
495,295
571,330
Total assets
19,141,204
18,805,732
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing
315,523
239,005
Interest-bearing
12,371,312
11,680,971
Total deposits
12,686,835
11,919,976
Borrowings
4,009,474
4,386,122
Deferred tax liabilities
29,228
25,289
Other liabilities
231,035
Total liabilities
16,956,572
16,562,422
Commitments and Contingencies
Shareholders' Equity
Common stock, without par value
Authorized - 75,000,000 shares
Issued and outstanding - 45,885,458 shares at June 30, 2025 and 45,767,166 shares at December 31, 2024
241,452
240,313
Preferred stock, without par value - 5,000,000 total shares authorized
6% Series B Preferred stock - $1,000 per share liquidation preference
Authorized - no shares at June 30, 2025 and 125,000 shares at December 31, 2024
Issued and outstanding - no shares at June 30, 2025 and 125,000 shares (equivalent to 5,000,000 depositary shares) at December 31, 2024
—
120,844
6% Series C Preferred stock - $1,000 per share liquidation preference
Authorized - 200,000 shares
Issued and outstanding - 196,181 shares (equivalent to 7,847,233 depositary shares)
191,084
8.25% Series D Preferred stock - $1,000 per share liquidation preference
Authorized - 300,000 shares
Issued and outstanding - 142,500 shares (equivalent to 5,700,000 depositary shares)
137,459
7.625% Series E Preferred stock - $1,000 per share liquidation preference
Authorized - 230,000 shares
Issued and outstanding - 230,000 shares (equivalent to 9,200,000 depositary shares)
222,748
Retained earnings
1,392,136
1,330,995
Accumulated other comprehensive loss
(247)
(133)
Total shareholders' equity
2,184,632
2,243,310
Total liabilities and shareholders' equity
*Derived from audited consolidated financial statements
See notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 2025 and 2024
Three Months Ended
Six Months Ended
2024
Interest Income
Loans
255,641
284,421
494,921
556,419
5,304
3,044
9,047
4,764
Investment securities:
Available for sale
12,095
14,784
24,453
29,172
Held to maturity
23,166
19,799
47,524
40,321
FHLB stock and other equity securities (dividends)
4,641
1,277
9,013
2,121
Other
3,552
4,948
6,645
9,649
Total interest income
304,399
328,273
591,603
642,446
Interest Expense
131,375
179,651
255,316
350,673
Short-term borrowings
36,981
11,612
70,345
18,834
Long-term borrowings
7,324
8,891
15,027
17,764
Total interest expense
175,680
200,154
340,688
387,271
Net Interest Income
128,719
128,119
250,915
255,175
Provision for credit losses
53,027
9,965
60,754
14,691
Net Interest Income After Provision for Credit Losses
75,692
118,154
190,161
240,484
Noninterest Income
Gain on sale of loans
23,342
11,168
34,961
20,524
Loan servicing fees, net
6,138
10,827
10,148
30,229
Mortgage warehouse fees
2,039
1,524
2,506
Losses on sale of investments available for sale (includes $0, $0, $0 and $(108), respectively, related to accumulated other comprehensive loss reclassifications)
(108)
Syndication and asset management fees
9,707
3,233
13,096
8,536
Other income
9,254
4,599
12,416
10,538
Total noninterest income
50,480
31,351
74,173
72,225
Noninterest Expense
Salaries and employee benefits
43,566
28,373
79,985
57,969
Loan expense
1,142
993
1,940
1,949
Occupancy and equipment
2,494
2,239
4,845
4,476
Professional fees
3,159
3,556
6,053
7,655
Deposit insurance expense
7,152
5,579
14,380
10,704
Technology expense
2,446
1,859
4,820
3,713
Credit risk transfer premium expense
4,767
2,294
8,629
Other expense
12,611
5,487
18,349
10,532
Total noninterest expense
77,337
50,380
139,001
99,292
Income Before Income Taxes
48,835
99,125
125,333
213,417
Provision for income taxes (includes $0, $0, $0 and $26, respectively, of income tax benefit related to accumulated other comprehensive loss reclassifications)
10,854
22,732
29,113
49,970
Net Income
37,981
76,393
96,220
163,447
Dividends on preferred stock
(10,266)
(7,757)
(20,531)
(16,424)
Impact of preferred stock redemption
(1,823)
(5,371)
Net Income Allocated to Common Shareholders
27,715
66,813
70,318
145,200
Basic Earnings Per Share
0.60
1.50
1.53
3.30
Diluted Earnings Per Share
1.49
3.29
Weighted-Average Shares Outstanding
Basic
45,883,644
44,569,345
45,853,998
43,937,665
Diluted
45,929,563
44,698,324
45,921,988
44,082,485
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Other Comprehensive Income:
Net unrealized (losses) gains on investment securities available for sale, net of tax (benefit) expense of $53, $(209), $36 and $(593), respectively
(170)
663
(114)
1,896
Add: Reclassification adjustment for losses included in net income, net of tax benefit of $0, $0, $0 and $26, respectively
82
Other comprehensive (loss) income for the period
1,978
Comprehensive Income
37,811
77,056
96,106
165,425
Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)
Shares
Amount
Common Stock
Balance beginning of period
45,881,706
240,512
43,354,718
139,950
45,767,166
43,242,928
140,365
Distribution to employee stock ownership plan
-
30,802
1,124
23,414
997
Issuance of common stock, net of $5.5 million in offering expenses
2,400,000
97,655
Shares issued for stock compensation plans, net of taxes withheld to satisfy tax obligations
3,752
940
2,849
887
87,490
15
91,225
(525)
Balance end of period
45,885,458
45,757,567
238,492
7% Series A Preferred Stock
2,081,800
50,221
Redemption of 7% Series A preferred stock
(2,081,800)
(50,221)
Balance at beginning and end of period
6% Series B Preferred Stock
125,000
Redemption of 6% Series B preferred stock
(125,000)
(120,844)
Balance at end of period
6% Series C Preferred Stock
196,181
8.25% Series D Preferred Stock
142,500
7.625% Series E Preferred Stock
230,000
Retained Earnings
1,369,009
1,138,083
1,063,599
Net income
Dividends on 7% Series A preferred stock, $1.75 per share, annually
(910)
Dividends on 6% Series B preferred stock, $60.00 per share, annually
(1,875)
(3,750)
Dividends on 6% Series C preferred stock, $60.00 per share, annually
(2,943)
(5,886)
Dividends on 8.25% Series D preferred stock, $82.50 per share, annually
(2,939)
(5,878)
Dividends on 7.625% Series E preferred stock, $76.25 per share, annually
(4,384)
(8,767)
Dividends on common stock, $0.40 per share, annually in 2025 and $0.36 per share, annually in 2024
(4,588)
(4,118)
(9,177)
(8,021)
Impact of 7% Series A preferred stock redemption
Impact of 6% Series B preferred stock redemption
(4,156)
Excise tax on preferred stock redemption
(1,215)
1,200,778
Accumulated Other Comprehensive Loss
(77)
(1,173)
(2,488)
Other comprehensive (loss) income
(510)
1,888,147
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2025 and 2024
Operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation
1,540
1,471
Loss on sale of securities
108
(34,961)
(20,524)
Proceeds from sales of loans
18,150,631
11,889,091
Loans and participations originated and purchased for sale
(18,254,897)
(12,260,927)
Proceeds from sale of low-income housing tax credits
9,777
27,564
Purchases of low-income housing tax credits for sale
(22,987)
(32,106)
Change in servicing rights for paydowns and fair value adjustments
5,550
(14,392)
Net change in:
25,779
(98,645)
(14,219)
(8,493)
(1,865)
5,592
5,564
470
Net cash provided by (used in) operating activities
26,886
(332,653)
Investing activities:
Net change in securities purchased under agreements to resell
20
45
Purchases of securities available for sale
(344,503)
(302,783)
Purchases of securities held to maturity
(155,268)
Purchases of mortgage servicing rights
(70)
Proceeds from the sale of securities available for sale
9,983
Proceeds from calls, maturities and paydowns of securities available for sale
391,790
382,840
Proceeds from calls, maturities and paydowns of securities held to maturity
116,573
68,376
Purchases of loans
(30,408)
(68,468)
Net change in loans receivable
(503,358)
(745,744)
Proceeds from loans held for sale previously classified as loans receivable
386,604
1,600
Purchase of FHLB stock
(46)
(19,316)
Proceeds from sale of FHLB stock
395
Purchases of premises and equipment
(11,358)
(7,590)
Purchase of limited partnership interests
(35,210)
(10,488)
Net cash paid on sale of branches
(170,594)
Other investing activities
2,737
4,839
Net cash used in investing activities
(27,229)
(1,012,173)
Financing activities:
Net change in deposits
577,652
1,085,442
Proceeds from borrowings
141,830,587
47,606,878
Repayment of borrowings
(142,197,028)
(47,404,262)
Proceeds from notes payable
3,592
Proceeds from issuance of common stock
Payment of credit linked notes
(10,605)
(11,529)
Repurchase of preferred stock
(52,045)
Dividends
(29,708)
(24,445)
Net cash provided by financing activities
170,898
1,301,286
Net Change in Cash and Cash Equivalents
170,555
(43,540)
Cash and Cash Equivalents, Beginning of Period
584,422
Cash and Cash Equivalents, End of Period
540,882
Supplemental Cash Flows Information:
Interest paid
344,939
371,467
Income taxes paid, net of refunds
41,093
46,043
Change in payable for limited partnership interest of LLCs
2,752
Change in ROU assets due to lease renegotiation
(1,063)
Investments received in securitization of loans sold
3,583
Liabilities accrued for additions in premises and equipment
2,627
Beneficial interests received in exchange for LIHTC's sold
4,227
Liabilities accrued for excise tax on preferred stock repurchase
1,215
Change in prepaid assets for preferred stock repurchase
Deposits received upon loan origination
189,206
Transfer of loans from loans held for sale to loans receivable
18,429
47,850
Transfer of loans from loans receivable to loans held for sale
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Merchants Bancorp, a registered bank holding company (the “Company”) and its wholly owned subsidiaries, Merchants Bank, FMBI (whose branches were sold to unaffiliated third parties and its remaining charter collapsed into Merchants Bank on January 26, 2024), and MAM. Merchants Bank’s primary operating subsidiaries include MCC, MCS, and MCI. All directly and indirectly owned subsidiaries of Merchants Bancorp are collectively referred to as the “Company”.
The accompanying unaudited condensed consolidated balance sheets of the Company as of December 31, 2024, which has been derived from audited consolidated financial statements, and unaudited condensed consolidated financial statements of the Company as of June 30, 2025 and for the three and six months ended June 30, 2025 and 2024, were prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company as of and for the year ended December 31, 2024 in its Annual Report on Form 10-K. Reference is made to the accounting policies of the Company described in the Notes to the Financial Statements contained in the Annual Report on Form 10-K.
All adjustments, which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying unaudited condensed consolidated financial statements. All interim amounts have not been audited and the results of operations for the three and six months ended June 30, 2025, herein are not necessarily indicative of the results of operations to be expected for the entire year.
Principles of Consolidation
The unaudited condensed consolidated financial statements as of and for the period ended June 30, 2025 and 2024 include results from the Company, and its wholly owned subsidiaries, Merchants Bank, FMBI (until its branches were sold and its bank charter merged into Merchants Bank on January 26, 2024), and MAM. Also included are Merchants Bank’s primary operating subsidiaries, MCC, MCS, and MCI, as well as all direct and indirectly owned subsidiaries owned by Merchants Bancorp.
The results of Merchants Foundation, Inc., a nonprofit corporation, are consolidated with the Company’s unaudited condensed consolidated financial statements in all periods presented.
In addition, when the Company makes an equity investment in or has a relationship with an entity for which it holds a variable interest, it is evaluated for consolidation requirements under ASC Topic 810. Accordingly, the Company assesses the entities for potential consolidation as a VIE and would only consolidate those entities for which it is a primary beneficiary. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the entity, and an interest that could be significant to the entity. To determine if an interest could be significant to the entity, both qualitative and quantitative factors regarding the nature, size and form of the Company’s involvement with the entity are evaluated. Alternatively, under the voting interest model, it would only consolidate those entities for which it has a controlling interest.
The Company holds a variable interest in an investment for which it is the primary beneficiary, and its results have been consolidated in all periods presented. Additionally, the Company has certain variable interest investments that it was deemed not to be a primary beneficiary of as of June 30, 2025 and December 31, 2024. These VIEs are not consolidated and the equity method or proportional amortization method of accounting has been applied. The Company will analyze whether the primary beneficiary designation has changed through triggering events on a prospective basis. Changes in facts and circumstances occurring since the previous primary beneficiary determination will be considered as part of this ongoing assessment. See Note 8: Variable Interest Entities (VIEs) for additional information about VIEs.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on loans and fair values of servicing rights and financial instruments.
Significant Accounting Policies
The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. For additional information regarding significant accounting policies, see the Company’s 2024 Annual Report on Form 10–K.
Restricted Cash
Included in cash equivalents is an account restricted as collateral for the potential risk of loss on senior credit linked notes issued by the Company in March 2023. The balance of the notes as of June 30, 2025 and December 31, 2024 was $76.9 million and $87.6 million, respectively. As of June 30, 2025 and December 31, 2024, there was $43.8 million and $33.5 million, respectively, in restricted cash held in a separate account included in the total of interest-earning demand accounts on the unaudited condensed consolidated balance sheets. Also see Note 10: Borrowings.
Reclassifications
Certain reclassifications have been made to the 2024 financial statements to conform to the financial statement presentation as of and for the three and six months ended June 30, 2025. These reclassifications had no effect on net income.
The Company and its subsidiaries can be parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the contingent liabilities, if any, arising from such proceedings and claims will not be material to the Company’s consolidated financial position or results of operations.
Recent Accounting Pronouncements
The Company continually monitors for potential accounting standards updates and SEC releases. The following updates and releases have been deemed to have the most applicability to the Company’s financial statements:
FASB ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued an ASU that will require public business entity’s disclosures to include an enhanced tabular tax rate reconciliation. The update will also require all public entities disclose income tax expense and taxes paid broken down by federal, state, and foreign with a disaggregation for jurisdictions that exceed 5% of income for taxes paid.
11
The updates in ASU 2023-09 are effective for annual periods beginning after December 15, 2024. An entity shall apply the ASU on a prospective basis to financial statements for annual periods beginning after the effective date. The Company does not expect it to have a material impact on the Company’s financial position or results of operations.
FASB ASU 2024-03 - Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses
In November 2024, the FASB issued an ASU which is intended to provide more detailed information about specified categories of expenses (purchases of inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the face of our consolidated statements of income.
The updates in ASU 2024-03 are effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. An entity may apply the ASU on a prospective basis to financial statements for annual periods beginning after the effective date. The Company is continuing to evaluate the impact of adopting this new guidance.
Note 2: Investment Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities available for sale and held to maturity were as follows:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Securities available for sale:
Treasury notes
70,125
27
70,102
Federal Agencies
260,000
310
259,699
Mortgage-backed - Government Agency (2) - multi-family
3,580
Mortgage-backed - Non-Agency - residential - fair value option (1)
407,539
Mortgage-backed - Agency - residential - fair value option (1)
195,423
Total securities available for sale
936,667
13
337
Securities held to maturity:
Mortgage-backed - Non-Agency - multi-family
550,912
1,479
549,433
Mortgage-backed - Non-Agency - residential
491,090
1,692
133
492,649
Mortgage-backed - Non-Agency - healthcare
494,439
494,442
Mortgage-backed - Agency - multi-family
11,770
769
11,001
Total securities held to maturity
1,695
2,381
1,547,525
FHLB and other equity securities (3)
12
December 31, 2024
89,898
90,006
253,218
282
252,936
1,162
430,779
205,167
980,224
592,053
590,891
526,242
1,871
75
528,038
534,538
374
534,912
11,853
1,020
10,833
2,245
2,257
1,664,674
(3)
The Company reports the carrying value utilizing the measurement alternative election, reflecting any impairments or other adjustments if observable price changes occur for identical or similar investments of the same issuer.
Accrued interest on securities available for sale totaled $5.3 million at June 30, 2025 and $4.9 million at December 31, 2024, and is excluded from the estimate of credit losses.
Accrued interest on securities held to maturity totaled $4.7 million at June 30, 2025 and $5.8 million at December 31, 2024, and is excluded from the estimate of credit losses.
The amortized cost and fair value of securities available for sale at June 30, 2025 and December 31, 2024, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Within one year
After one through five years
330,125
329,801
343,116
342,942
Mortgage-backed - Non-Agency residential - fair value option
Mortgage-backed - Agency - residential - fair value option
During the three and six months ended June 30, 2025, no securities available for sale were sold. During the three months ended June 30, 2024, no securities available for sale were sold. During the six months ended June 30, 2024, the Company received proceeds of $10.0 million and recognized a net loss of $108,000 from sales of securities available for sale, which consisted of $10,000 in gains and $118,000 of losses.
The following tables show the Company’s gross unrealized losses and fair value of the Company’s investment securities with unrealized losses for which an ACL has not been recorded, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2025 and December 31, 2024:
12 Months or
Less than 12 Months
Longer
Total
26,900
234,690
261,590
14
Allowance for Credit Losses
For securities available for sale with an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Any expected loss that is not credit-related is recognized in accumulated other comprehensive loss, net of tax. Credit-related expected losses are recognized as an ACL for securities available for sale on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company expects, or is required, to sell a security available for sale before recovering its amortized cost basis, the entire expected credit loss amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.
In evaluating securities available for sale in unrealized loss positions for credit losses and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized losses on the Company’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. There were no credit-related factors underlying unrealized losses on available for sale debt securities at June 30, 2025 and December 31, 2024.
Securities held to maturity are primarily comprised of non-Agency mortgage-backed senior securities secured by multi-family, single-family or healthcare properties, and agency mortgage-backed securities secured by multi-family properties. The agency securities held to maturity are Ginnie Mae mortgage-backed securities and backed by the full faith and credit of the U.S. government and have an implicit or explicit government guarantee. Accordingly, no allowance for credit losses has been recorded for these securities.
For non-Agency mortgage-backed senior securities, qualitative factors are evaluated, including the timeliness of principal and interest payments under the contractual terms of the securities, as well as the investment ratings assigned to the securities by third parties and their qualification to be pledged to FHLB as collateral. In the event credit stress in the underlying loans is identified in any single security, risk grades and collateral values are evaluated to determine whether the bank has exposure to credit losses.
The Company has a held to maturity mortgage-backed security with an amortized cost value of $550.9 million and fair value of $549.4 million at June 30, 2025, acquired via a mortgage securitization transaction facilitated by the Company, which has experienced delinquencies in some of the underlying loans. The underlying loans in the securitization have an average loan-to-value ratio of 61%. Additionally, the security is a senior tranche that has credit protection from the first 14.4% of losses. The company continues to receive timely interest payments on this security, which is current as of June 30, 2025. The asset is not expected to have credit losses based on the loan-to-value of the underlying loans, its credit protection and expected cash flows. However, given the delinquencies on some of the underlying loans, the Company has classified the security as Special Mention as of June 30, 2025. All other securities held to maturity were classified as Pass as of June 30, 2025. All securities held to maturity were classified as Pass as of December 31, 2024. No allowance for credit losses were recorded for this, or any other non-agency security, as of June 30, 2025 and December 31, 2024.
Note 3: Mortgage Loans in Process of Securitization
Mortgage loans in process of securitization are recorded at fair value with changes in fair value recorded in earnings. These include multi-family rental real estate loan originations to be sold as Ginnie Mae mortgage-backed
securities and Fannie Mae and Freddie Mac participation certificates, all of which are pending settlement under firm investor commitments to purchase the securities, typically occurring within 30 days. The aggregate positive fair value adjustment recorded in mortgage loans in process of securitization was $3.0 million and $4.1 million as of June 30, 2025 and December 31, 2024, respectively.
Note 4: Loans and Allowance for Credit Losses on Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost at their outstanding principal balances adjusted for unearned income, charge-offs, the ACL-Loans, any unamortized deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans.
For loans at amortized cost, interest income is accrued based on the unpaid principal balance.
The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately from the related loan balance on the unaudited condensed consolidated balance sheets. Accrued interest on loans totaled $47.5 million and $51.9 million at June 30, 2025 and December 31, 2024, respectively.
The Company also elected not to measure an allowance for credit losses for accrued interest receivables. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. Loans may be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest subsequently collected on these loans is applied to the principal balance until the loan can be returned to an accrual status, which is no less than six months. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
For all loan portfolio segments, the Company charges off loans, or portions thereof, when available information confirms that specific loans are uncollectable based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations.
For loan modifications, interest income is recognized on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.
The Company offers mortgage warehouse repurchase agreements to third parties to fund mortgage loans held for sale from closing until sale to an investor. Under a warehousing arrangement, the Company funds a mortgage loan as secured financing. The warehousing arrangement is secured by the underlying mortgages and a combination of deposits, personal guarantees and advance rates, and may be cross-collateralized with other loans. The Company typically holds the collateral until it is sent under a bailee arrangement instructing the investor to send proceeds to the Company. Typical investors are large financial institutions or government agencies. Interest earned from the time of funding to the time of sale is recognized as interest income as accrued. Warehouse fees are accrued as noninterest income.
16
Loan Portfolio Summary
Loans receivable at June 30, 2025 and December 31, 2024 include:
Mortgage warehouse repurchase agreements
1,843,742
1,446,068
Residential real estate(1)
988,783
1,322,853
Multi-family financing
4,833,548
4,624,299
Healthcare financing
1,442,095
1,484,483
Commercial and commercial real estate(2)(3)
1,328,765
1,476,211
Agricultural production and real estate
82,425
77,631
Consumer and margin loans
4,570
6,843
Loans Receivable
10,523,928
10,438,388
Less:
ACL-Loans
91,811
84,386
Loans Receivable, net
Risk characteristics applicable to each segment of the loan portfolio are described as follows.
Mortgage Warehouse Repurchase Agreements (MTG WHRA): Under its warehouse program, the Company provides warehouse financing arrangements to approved mortgage companies for their origination and sale of residential mortgage and multi-family loans. Loans secured by mortgages placed on existing one-to-four family dwellings may be originated or purchased and placed through each mortgage warehouse facility.
As a secured repurchase agreement, collateral pledged to the Company secures each individual mortgage until the mortgage company sells the loan in the secondary market. A traditional secured warehouse facility typically carries a base interest rate of the SOFR, or mortgage note rate, and a margin.
Risk is evident if there is a change in the fair value of mortgage loans originated by mortgage companies in warehouse, the sale of which is the expected source of repayment under a warehouse facility. However, the warehouse customers are required to hedge the change in value of these loans to mitigate the risk, typically through forward sales contracts.
Residential Real Estate Loans (RES RE): Real estate loans are secured primarily by owner-occupied one-to-four family residences. Repayment of residential real estate loans is primarily dependent on the personal income and assets of the borrowers. Credit risk for these loans is driven by those factors, as well as the credit rating of the borrowers and property values. In addition to loans originated for sale, and some loans held for investment, included in this segment are All-in-One© first-lien HELOC products that integrate a borrower’s mortgage and deposit account into a single facility and have typically carried a base interest rate of One-Year CMT, plus a margin. New originations are tied to 30-day SOFR, plus a margin.
17
Multi-Family Financing (MF FIN): The Company specializes in originating multi-family financing that can be Market Rate or Affordable. The portfolio includes loans for construction, acquisition, refinance, or permanent financing. Loans are typically secured by real estate mortgages, assignment of LIHTCs, and/or equity interest in the underlying properties. All loans are assessed and reviewed at a minimum based on borrower strength/experience, historical property performance, market trends, projected financial performance with regards to intended strategy, and source of repayment. Independent third-party reports are used to ensure legal conformity and support valuations of the assets. Exit strategies and sources of repayment are provided through the secondary market via governmental programs, strategic refinances, LIHTC equity installments, and cashflow from the properties. Repayment of these loans depends on the successful operation of a business or property and the borrower’s cash flows. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the related market area. These loans are well-collateralized and underwritten to agency guidelines. Loans included in this segment typically carry a base rate of 30-day SOFR that adjusts on a monthly basis, and a margin. The Company focuses on loan classes that are government backed or can be sold in the secondary market.
Healthcare Financing (HC FIN): The healthcare financing portfolio includes customized loan products for independent living, assisted living, memory care and skilled nursing projects. A variety of loan products are available to accommodate rehabilitation, acquisition, and refinancing of healthcare properties. Credit risk in these loans is primarily driven by local demographics and the expertise of the operators of the facilities. Repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained, as well as successful operation of a business or property and the borrower’s cash flows. These loans are well-collateralized and underwritten to agency guidelines. Loans included in this segment typically carry a base rate of 30-day SOFR that adjusts on a monthly basis, and a margin. The Company focuses on loan classes that are government backed or can be sold in the secondary market.
Commercial Lending and Commercial Real Estate Loans (CML & CRE): The commercial lending and commercial real estate portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions, as well as loans to commercial customers to finance land and improvements. It also includes lines of credit collateralized by mortgage servicing rights that are assessed for fair value quarterly at the Company’s request. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. SBA loans are included in this category. An immaterial portion of commercial and commercial real estate loans are typically made up of non-owner occupied commercial real estate loans.
Agricultural Production and Real Estate Loans (AG & AGRE): Agricultural production loans are generally comprised of seasonal operating lines of credit to grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. The Company also offers long-term financing to purchase agricultural real estate. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating-year based on industry-developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. The Company is approved to sell agricultural loans in the secondary market through Farmer Mac and uses this relationship to manage interest rate risk within the portfolio. Agricultural real estate loans included in this segment are typically structured with a one-year ARM, three-year ARM or five-year ARM indexed to CMT and a margin. Agriculture production, livestock, and equipment loans are structured with variable rates that are indexed to prime or fixed for terms not exceeding five years.
Consumer and Margin Loans (CON & MAR): Consumer loans are those loans secured by household assets. Margin loans are those loans secured by marketable securities. The term and maximum amount for these loans are determined by considering the purpose of the loan, the margin (advance percentage against value) in all collateral, the primary source of repayment, and the borrower’s other related cash flow.
18
The ACL-Loans is the Company’s estimate of current expected life of loan credit losses. Loans receivable is presented net of the allowance to reflect the principal balance expected to be collected over the contractual term of the loans. This life of loan allowance is established through a provision for credit losses included in net interest income after provision for credit losses as loans are recorded in the unaudited condensed consolidated financial statements. The provision for a reporting period also reflects increases or decreases in the allowance related to changes in credit loss expectations. Actual credit losses are charged against the allowance when management believes the loan balance, or a portion thereof, is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
The ACL-Loans is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans considering relevant available information from internal and external sources, including historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. The allowance also incorporates reasonable and supportable forecasts. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The level of the ACL-Loans is believed to be adequate to absorb expected future losses in the loan portfolio as of the measurement date.
The ACL-Loans consists of individually evaluated loans and pooled loan components. The Company’s primary portfolio segmentation is by loans with similar risk characteristics. Loans risk graded substandard and worse are individually evaluated for expected credit losses. For individually evaluated loans that are collateral dependent, the Company may use the fair value of the collateral, less estimated costs to sell, as a practical expedient as of the reporting date to determine the carrying amount of an asset and the allowance for credit losses, as applicable. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or the sale of the collateral when the borrower is experiencing financial difficulty as of the reporting date.
To calculate the ACL-Loans, the portfolio is segmented by loans with similar risk characteristics.
Loan Portfolio Segment
ACL-Loans Methodology
Remaining Life Method
Residential real estate loans
Discounted Cash Flow
Commercial and commercial real estate
Loan characteristics used in determining the segmentation include the underlying collateral, type or purpose of the loan, and expected credit loss patterns. The initial estimation of expected credit losses for each segment is based on historical credit loss experience and management’s judgement. Given the Company’s modest historical credit loss experience, peer and industry data was incorporated into the measurement. Expected life of loan credit losses are quantified using discounted cash flows and remaining life methodologies.
Model results are supplemented by qualitative adjustments for risk factors relevant in assessing the expected credit losses within the portfolio segments. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor.
The models utilized and the applicable qualitative adjustments require assumptions and management judgement that can be subjective in nature. The above measurement approach is also used to estimate the expected credit losses associated with unfunded loan commitments, which also incorporates expected utilization rates.
19
The following tables present, by loan portfolio segment, the activity in the ACL-Loans for the three and six months ended June 30, 2025 and 2024:
Three Months Ended June 30, 2025
MTG WHRA
RES RE
MF FIN
HC FIN
CML & CRE
AG & AGRE
CON & MAR
TOTAL
Balance, beginning of period
3,747
6,145
53,416
9,127
10,295
608
83,413
1,167
(1,634)
48,364
4,714
1,822
29
(1)
54,461
Loans charged to the allowance
(38,309)
(7,497)
(257)
(46,063)
Recoveries of loans previously charged-off
Balance, end of period
4,914
4,511
63,471
6,344
11,860
637
74
Three Months Ended June 30, 2024
3,022
6,905
28,664
24,587
11,990
450
94
75,712
594
(595)
9,097
(1,065)
702
39
(19)
8,753
(3,349)
(103)
(3,452)
3,616
6,323
34,412
23,522
12,591
489
81,028
The Company recorded a total provision for credit losses of $53.0 million for the three months ended June 30, 2025. The $53.0 million total provision for credit losses consisted of $54.5 million for the ACL-Loans as shown above, net of $1.1 million for the ACL-OBCE’s and $0.4 million for the release of reserves on the ACL-Guarantees, related to a loan securitization.
The Company recorded a total provision for credit losses of $10.0 million for the three months ended June 30, 2024. The $10.0 million total provision for credit losses consisted of $8.8 million for the ACL-Loans as shown above and $1.2 million for the ACL-OBCE’s.
Six Months Ended June 30, 2025
3,816
5,942
55,126
8,562
10,293
539
1,098
(1,431)
57,048
5,279
1,909
98
(34)
63,967
(48,703)
(370)
(56,570)
28
Six Months Ended June 30, 2024
2,070
7,323
26,874
22,454
12,243
619
169
71,752
FMBI's ACL for loans sold
(55)
(186)
(2)
(92)
(246)
(12)
(593)
1,546
(958)
11,073
1,070
1,465
116
(82)
14,230
(1,028)
(4,377)
The Company recorded a total provision for credit losses of $60.8 million for the six months ended June 30, 2025. The $60.8 million total provision for credit losses consisted of $64.0 million for the ACL-Loans as shown above,
net of $2.8 million for the ACL-OBCE’s and $0.4 million for the release of reserves on the ACL-Guarantees, related to a loan securitization.
The Company recorded a total provision for credit losses of $14.7 million for the six months ended June 30, 2024. The $14.7 million total provision for credit losses consisted of $14.2 million for the ACL-Loans as shown above, $1.1 million for the ACL-OBCE’s, net of $0.6 million for the release of FMBI’s ACL-Loans for loans sold.
The following table presents, by loan portfolio segment, the activity in the ACL-Loans, for the year-ended December 31, 2024:
Year Ended December 31, 2024
1,746
(1,340)
33,674
(10,795)
276
166
(49)
23,678
(5,282)
(3,095)
(2,210)
(10,587)
46
76
136
The Company recorded a total provision for credit losses of $24.3 million for the year ended December 31, 2024. The $24.3 million provision for credit losses consisted of $23.7 million for the ACL-Loans as shown above, $2.2 million for the ACL-OBCEs, net of $1.0 million for the release of reserves on ACL-Guarantees, related to a loan securitization and $0.6 million for the release of FMBI’s ACL-Loans for loans sold.
The table below presents the amortized cost basis and ACL-Loans allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses as of June 30, 2025 and December 31, 2024:
Real Estate
Accounts Receivable / Equipment
ACL-Loans Allocation
7,964
294,206
693
294,899
30,324
103,288
454
8,813
1,447
1,060
11,320
2,226
181
186
Total collateral dependent loans
414,452
1,452
1,753
417,657
33,045
There were no significant changes to the types of collateral securing the Company’s collateral dependent loans compared to December 31, 2024.
6,153
31
227,054
227,747
22,265
73,225
2,569
8,125
629
10,201
358
1
314,557
1,453
1,322
317,332
25,224
21
Internal Risk Categories
The Company evaluates the loan risk grading system definitions and ACL-Loans methodology on an ongoing basis. In adherence with policy, the Company uses the following internal risk grading categories and definitions for loans:
Pass - Loans that are considered to be of acceptable credit quality, and not classified as Special Mention, Substandard or Doubtful. Also included are loans classified as Watch loans, which represent loans that remain sound and collectible but contain elevated risk that requires management’s attention.
Special Mention – Loans classified as Special Mention have potential weaknesses that deserve management’s attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention loans are not adversely classified and do not warrant adverse classification. Loans with questions or concerns regarding collateral, adverse market conditions impacting future performance, and declining financial trends would be considered for Special Mention.
Substandard - Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. When a loan in the form of a line of credit is downgraded to Substandard, it is evaluated for credit losses and future draws under the line of credit require the approval of an officer of Senior Credit Officer or above.
Doubtful - Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
22
The following tables present the credit risk profile of the Company’s loan portfolio based on internal risk rating category and origination year as of June 30, 2025 and December 31, 2024:
2023
2022
2021
Prior
Revolving Loans
Pass
24,996
39,767
28,692
7,458
5,152
23,199
851,555
980,819
Substandard
129
7,813
7,480
23,328
859,368
726,822
774,109
320,907
222,274
41,803
11,004
2,336,075
4,432,994
Special Mention
59,903
17,000
23,934
235
4,583
105,655
13,545
14,601
160,419
78,486
27,848
800,270
805,710
481,326
324,694
11,239
2,368,506
Charge-offs
10,135
34,917
3,651
48,703
540,046
78,920
112,643
241,655
306,548
1,279,812
17,368
30,237
5,450
5,940
58,995
42,521
25,600
9,000
20,317
5,850
557,414
151,678
138,243
256,105
318,338
5,296
2,201
7,497
38,225
52,569
46,200
103,145
36,693
29,685
1,004,155
1,310,672
3,310
442
1,616
1,283
47
6,773
447
148
8,988
26
1,074
41,535
53,016
46,790
105,398
46,964
29,758
1,005,304
147
110
113
370
16,263
7,264
4,688
2,858
20,482
21,782
82,150
8,902
7,269
4,869
80
250
33
4,193
Total Pass
1,338,982
961,878
515,739
579,231
86,509
84,370
6,368,050
9,934,759
Total Special Mention
80,670
47,237
31,000
10,598
171,512
Total Substandard
57,569
186,172
88,326
29,305
155
42,585
Total Loans
1,433,197
1,066,684
702,353
698,557
117,097
84,807
6,421,233
Total Charge-offs
10,282
35,027
5,409
5,852
56,570
The table above excludes two multi-family loans, rated as Special Mention, totaling $41.6 million and classified as held for sale at June 30, 2025. The Company did not have any material revolving loans converted to term loans that were not re-underwritten at June 30, 2025.
23
2020
40,363
30,750
8,212
6,181
18,712
6,210
1,206,272
1,316,700
203
5,928
8,234
6,413
1,212,200
1,028,288
518,320
419,723
66,787
5,460
10,456
2,109,707
4,158,741
88,337
77,700
57,679
238
13,857
237,811
18,884
105,553
76,093
2,550
24,667
1,135,509
701,573
553,495
69,337
10,694
2,148,231
870
4,412
5,282
460,259
112,223
466,393
234,316
1,273,191
32,547
8,900
96,620
138,067
13,961
25,363
8,301
506,767
137,823
475,293
339,237
3,095
52,323
45,999
107,451
48,903
16,264
18,216
1,172,763
1,461,919
2,331
1,633
52
4,091
40
150
8,835
41
1,025
52,363
46,149
109,892
59,371
18,309
1,173,863
253
982
975
2,210
17,328
7,373
4,676
3,170
8,790
13,705
22,583
77,625
7,379
326
4,151
2,264
1,598,887
714,740
1,006,473
125,050
49,226
52,738
6,193,973
9,741,087
120,884
68,910
290
110,552
379,969
32,885
131,309
76,225
36,748
244
39,921
1,752,656
923,749
1,151,608
163,431
53,272
6,344,446
4,665
4,077
10,587
The table above excludes one multi-family loan, rated as Special Mention, totaling $17.4 million and classified as held for sale at December 31, 2024. The Company did not have any material revolving loans converted to term loans that were not re-underwritten at December 31, 2024.
24
Delinquent Loans
The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of June 30, 2025 and December 31, 2024.
30-59 Days
60-89 Days
90+ Days
Past Due
Current
(Dollars in thousands)
4,720
90
6,279
11,089
977,694
11,370
174,926
186,296
4,647,252
16,101
61,416
77,517
1,364,578
70
4,032
4,102
1,324,663
82,420
32,191
160
246,658
279,009
10,244,919
%
97
100
The Company did not have any loans classified as held for sale that were past due as of June 30, 2025.
1,294
3,797
2,339
7,430
1,315,423
8,497
11,148
201,508
221,153
4,403,146
59,264
1,425,219
596
688
3,047
4,331
1,471,880
73
85
77,546
10,460
15,633
266,170
292,263
10,146,125
The table above excludes one multi-family loan of $30.1 million and two residential real estate loans totaling $2.1 million, 30-59 days past due, and one residential real estate loan of $0.1 million, 90+ days past due, classified as held for sale at December 31, 2024.
Nonperforming Loans and Assets
Nonaccrual loans, including modified loans to borrowers experiencing financial difficulty that have not met the six-month minimum performance criterion, are reported as nonperforming loans. For all loan classes, it is the Company’s policy to have any modified loans which are on nonaccrual status prior to being modified, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is doubtful under the terms of the loan agreement. Generally, this is at 90 days or more past due. Interest income of $0 and $0.1 million for the three and six months ended June 30, 2025, respectively, and $0.9 million for both the three and six months ended June 30, 2024, was recognized on nonaccrual financial assets at the time of payoff.
25
The following table presents the Company’s nonperforming loans and nonperforming assets at June 30, 2025 and December 31, 2024.
Total Loans >
90 Days &
Nonaccrual
Accruing
7,835
6,154
177,530
585
69,001
250,818
714
279,716
The Company did not have any loans classified as held for sale on nonaccrual or past due as of June 30, 2025. The table above excludes one residential real estate loan, classified as held for sale, on nonaccrual at December 31, 2024, totaling $0.1 million.
The Company did not have any nonaccrual loans without an estimated ACL at June 30, 2025 or December 31, 2024.
Modifications to Borrowers Experiencing Financial Difficulty
Occasionally, the Company modifies loans to borrowers in financial difficulty by providing principal forgiveness, term extension, an other-than-insignificant payment delay, or interest rate reduction. In some cases, the Company provides multiple types of modifications on one loan. Typically, one type of modification, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another modification, such as principal forgiveness, may be granted, but is rare.
The following tables present the amortized cost basis of loans at June 30, 2025 and June 30, 2024 that were both experiencing financial difficulty and modified during the three and six months ended June 30, 2025 and June 30, 2024, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.
Payment Delay
Term Extension
Combination - Term Extension and Payment Delay
Total Class of Financing Receivable
% of Total Class of Financing Receivable
25,425
40,361
65,786
177
40,538
65,963
35,137
42,452
77,589
4,240
46,692
81,829
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty. Loans with risk classifications of Pass and Special Mention were part of the pooled loan ACL analysis. Loans classified as Substandard or worse were individually evaluated for credit losses and specific reserves were established, if applicable. During the three and six months ended June 30, 2025, there were no specific reserves recorded on troubled loan modifications disclosed herein. The Company has committed to lend no additional amounts to the borrowers included in the table below.
Combination - Term Extension and Forbearance
Loan Type
Financial Effect
Added a weighted average 7 months.
Term extension and forbearance added a weighted average of 6 months.
Term extension added a weighted average of 61 months and forbearance added a weighted average of 12 months.
Added a weighted average 28 months.
Forbearance average of 7 months.
Added a weighted average 12 months.
The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified in the last twelve months as of June 30, 2025:
30 - 89 Days
58,088
7,698
58,265
17,347
75,612
Multi-family loans totaling $9.6 million that had prior forbearance modifications defaulted during the three and six months ended June 30, 2025.
Immaterial Revision of Prior Period Footnote Disclosures Regarding Troubled Loan Modifications
The Company revised amounts reported in the previously issued Form 10-Q for the period end June 30, 2024 related to TLMs in the above notes to the unaudited condensed consolidated financial statements due to incorrectly classifying eight loans totaling $104.6 million as TLMs that did not meet the Company’s definition of a TLM. For comparative purposes, the Company has made a revision to the applicable prior period notes in this section to reflect this correction. The impacts of the misclassification and subsequent revisions are contained entirely within these disclosures and had no impact to the unaudited condensed consolidated financial statements for the period ended June 30, 2024. The effect of this error was evaluated by the Company in accordance with SEC Staff Accounting Bulletins No. 99 and 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures.
Foreclosures
There were $2.6 million in residential loans in the process of foreclosure as of June 30, 2025 and there were $1.9 million in process of foreclosure as of December 31, 2024.
Significant Loan Sales
On June 5, 2025, the Company completed a $373.3 million securitization of 18 multi-family mortgage loans through a Freddie Mac-sponsored Q-Series transaction. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860, and a $5.9 million gain on sale was recognized. The Company was retained as the mortgage sub-servicer for Freddie Mac on the entire $373.3 million pool of loans. Beyond sub-servicing the loans, the Company’s ongoing involvement in this transaction is limited to customary obligations of loan sales, including any material breach in representation. In connection with this transaction, a mortgage servicing right of $1.6 million was established.
On June 27, 2025, the Company completed a $312.1 million sale of All-in-One©, first-lien home equity lines of credit through a sale to a related third party. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860, and a $2.2 million gain on sale was recognized. The Company was retained as the mortgage sub-servicer on the entire $312.1 million pool of loans. Beyond sub-servicing the loans, the Company’s ongoing involvement in this transaction is limited to customary obligations of loan sales, including any material breach in representation. No mortgage servicing right was established in connection with this transaction.
Loans Purchased
The Company purchased $30.4 million and $68.5 million of loans during the six months ended June 30, 2025 and 2024, respectively.
Loan Guarantees
The Company issues instruments, in the normal course of business with customers, that are considered financial guarantees. Standby letters of credit guarantees are issued in connection with agreements made by customers to counterparties. Standby letters of credit are contingent upon failure of the customer to perform the terms of the underlying contract. Credit risk associated with the standby letters of credit is essentially the same as that associated with extending loans to customers and is subject to normal credit policies. The terms of these standby letters of credit range from less than one to eight years. These commitments are not recorded in the unaudited condensed consolidated financial statements. The total for these guarantees at June 30, 2025 and December 31, 2024 was $178.1 million and $204.7 million, respectively.
Note 5: Qualified Affordable Housing and Other Tax Credits
The Company invests in LIHTC limited liability partnerships and LLCs. The primary purpose of these investments is to earn an adequate return of capital through the receipt of low-income housing tax credits. Those investments are recorded at cost and then amortized using the proportional amortization method. The investments are included in other assets on the unaudited condensed consolidated balance sheets, with any unfunded commitments included in other liabilities. The investments are amortized as a component of income tax expense.
The Company also has a pool of investments that are held for sale and are accounted for at the lower of cost or market. These investments include projects that are awaiting syndication in LIHTC funds through our MCI subsidiary. The investments are included in other assets on the unaudited condensed consolidated balance sheets.
The Company is the primary beneficiary in one of its joint venture investments, therefore the results of this entity are consolidated and the benefits of the new market fund are recognized through tax credits as a component of income tax expense.
Investment
Accounting Method
Unfunded Commitments
LIHTC
Proportional amortization
153,596
91,904
123,574
93,929
LIHTC (1)
Lower of cost or market
45,580
56,533
LIHTC subtotal
199,176
180,107
Joint Venture
Consolidated
10,937
210,113
191,044
The following table summarizes the amortization expense and tax credits recognized for the Company’s low-income housing investments for the three and six months ended June 30, 2025 and 2024.
Amortization expense
3,784
2,305
7,559
5,145
Expected tax credits
4,095
2,391
8,369
5,418
The Company serves as a general partner for several syndicated low-income housing tax credit funds that are owned by one investor, holding 99.99% of the funds, as a limited partner. The Company, as general partner, provided services during 2024 and prior years, such as formation of the funds and identifying or acquiring tax credit investments, for which it expects to receive fees in the future, up to approximately $19.3 million. The amount of payments to be received as the general partner is contingent upon achieving certain performance obligations, including the stabilization of the properties and delivery of tax credits to the limited partner in the future, which could extend out until 2042. Due to the long-term nature of the agreement, amounts to be received, and the uncertainty of achieving the performance obligation, variable consideration and revenue recognition has been 100% constrained as of June 30, 2025. Revenue recognition will be continuously evaluated as facts and circumstances evolve. The Company has also advanced these LIHTC funds $81.4 million as of June 30, 2025 and $98.8 million as of December 31, 2024 to acquire its LIHTC investment projects, for which it expects repayment over a similar period. These advances have been recorded in other assets on the unaudited condensed consolidated balance sheets.
Note 6: Leases
The Company has operating leases for various locations with terms ranging from one to seven years. Some operating leases include options to extend. The extensions were included in the right-of-use asset if the likelihood of extension was reasonably certain. The Company elected not to separate non-lease components from lease components for its operating leases.
Supplemental balance sheet information related to leases is presented in the table below as of June 30, 2025 and December 31, 2024:
Balance Sheet
Operating lease ROU asset (in other assets)
7,429
8,332
Operating lease liability (in other liabilities)
8,325
9,303
Weighted average remaining lease term (years)
4.1
4.6
Weighted average discount rate
3.44%
3.43%
30
The table below presents the components of lease expenses for the three and six months ended June 30, 2025 and 2024. Operating lease expenses are included in occupancy and equipment expense on the unaudited condensed consolidated income statement.
Statement of Income
Components of lease expense:
Operating lease cost
738
765
1,432
1,369
Supplemental cash flow information related to leases is presented in the tables below.
Maturities of lease liabilities:
One year or less
2,354
Year two
2,273
Year three
1,989
Year four
1,312
Year five
707
Thereafter
299
Total future minimum lease payments
8,934
Less: imputed interest
609
Cash Flow Statement
Supplemental cash flow information:
Operating cash flows for operating leases
1,133
1,220
Note 7: Other Assets and Receivables
The following items are included in other assets and receivables on the consolidated balance sheets.
Joint Ventures
The Company has investments in various joint ventures totaling $50.9 million and $42.2 million at June 30, 2025 and December 31, 2024, respectively. These investments are primarily made up of investments in debt funds totaling $30.5 million and $31.8 million at June 30, 2025 and December 31, 2024, respectively. The Company was not a primary beneficiary in any of these joint venture investments. Results from the entities are not required to be consolidated and are accounted for under the equity method of accounting. The Company is obligated to make additional investments over the next several years. There was an obligation of $10.0 million and $3.8 million reflected in the investment balance and liabilities at June 30, 2025 and December 31, 2024, respectively. See Note 8: Variable Interest Entities (VIEs) for additional information about VIE’s.
Qualified Affordable Housing
Information regarding qualified affordable housing investments is disclosed elsewhere in Note 5: Qualified Affordable Housing and Other Tax Credits.
Freestanding Credit Enhancements
In December 2024, the Company executed a CDS on a reference pool of warehouse loans with an initial principal balance of $1.2 billion. The initial pool consisted of warehouse participation certificates, classified as loans held for sale, but could include warehouse repurchase agreements, classified as loans receivable. The protected tranche will cover the first 12.5% of losses on the notional amount. Annual CDS premium payments equal 0.8% of the portfolio notional amount and is recorded as noninterest expense. Merchants will continually replenish maturing or non-renewing loans with substantially similar loans subject to mutual agreement of buyer and seller during a replenishment period, subject to a minimum balance of $1.2 billion and a maximum balance of $2.0 billion. The risk transfer agreement has a replenishment period of 36 months but can be extended to a maximum of 48 months.
The CDS is not accounted for as a derivative. A scope exception within ASC 815 – Derivatives and Hedging for certain financial guarantees is utilized, as recovery payments are contingent on the failure of the debtor to pay their past due obligations, which are preconditions to the guarantee. Accordingly, the CDS has been accounted for as a freestanding credit enhancement and does not offset the Company’s estimate of expected credit losses. Therefore, the ACL-loans will continue to be recorded without considering potential recoveries from freestanding credit enhancement contracts. Upon initial execution, there was no CDS recovery asset established because the loans in the pool were participation certificates that were classified as loans held for sale and carry no ACL-loans. When repurchase agreements are in the pool, they are classified as loans receivable, and a CDS recovery asset would be established in other assets, with an equal benefit to CDS recovery income in other noninterest income for the protected portion of the amounts included in the ACL-loans. The recovery asset and recovery income accounts are adjusted as the ACL-loans is adjusted for changes in loss expectations.
As of June 30, 2025 and December 31, 2024, a CDS recovery asset of $445,000 and $0, respectively, was established based on the repurchase agreements included in loans receivable. The total loan pool balances were $2.0 billion and $1.2 billion as of June 30, 2025 and December 31, 2024, respectively.
Note 8: Variable Interest Entities
A VIE is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets generally that either:
The Company has invested in single-family, multi-family, and healthcare debt financing entities, as well as low-income housing syndicated funds that are deemed to be VIEs. The Company also has deemed REMIC trusts as VIEs that were established in conjunction with multi-family and healthcare loan sales and securitization transactions. Accordingly, the entities were assessed for potential consolidation under the VIE model that requires primary beneficiaries to consolidate the entity’s results. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the entity, and an interest that could be significant to the entity. To determine if an interest could be significant to the entity, both qualitative and quantitative factors regarding the nature, size and form of involvement with the entity are evaluated.
32
At June 30, 2025 the Company determined it was not the primary beneficiary for most of its VIEs, primarily because the Company did not have control or the obligation to absorb losses or the rights to receive benefits from the VIE that could potentially be significant to the VIE. Evaluation and reassessment of VIEs for consolidation is performed on an ongoing basis by management. Any changes in facts and circumstances occurring since the previous primary beneficiary determination will be considered as part of this ongoing reassessment.
The table below reflects the assets of the VIEs, as well as the maximum exposure to loss in connection with unconsolidated VIEs and liabilities for binding, unfunded commitments at June 30, 2025 and December 31, 2024. The Company’s maximum exposure to loss associated with its unconsolidated VIEs consists of the capital invested plus any unfunded equity commitments. These investments are recorded in other assets and other liabilities on the unaudited condensed consolidated balance sheets. Also included in the maximum loss exposure are loans to VIEs that are included in loans receivable. Although the REMIC trusts are not recognized on the balance sheet, the maximum exposure to loss is the carrying value of the securities acquired as part of the securitization transactions.
Investments
Securities
Maximum
in VIEs
to VIEs
for VIEs
Exposure to Loss
Low-income housing tax credit investments
236,005
343,398
579,403
81,606
Debt funds
30,536
241,367
271,903
Mortgage-backed securitizations (1)
21,924
1,536,441
1,558,365
Total Unconsolidated VIEs
266,541
606,689
2,409,671
225,727
282,584
508,311
89,956
31,772
109,480
141,252
23,564
1,652,833
1,676,397
257,499
415,628
2,325,960
92,708
Note 9: Deposits
Deposits were comprised of the following at June 30, 2025 and December 31, 2024:
Noninterest-bearing deposits
Core demand deposits
Interest-bearing deposits
Demand deposits:
6,066,933
4,319,512
Brokered demand deposits
250,000
Total interest-earning demand deposits
6,316,933
Savings deposits:
Core savings deposits
3,703,270
3,442,111
Brokered savings deposits
859
Total savings deposits
3,703,628
3,442,970
Certificates of deposit:
Core certificates of deposits
1,346,630
1,385,270
Brokered certificates of deposits
1,004,121
2,533,219
Total certificates of deposits
2,350,751
3,918,489
Total interest-bearing deposits
Total core deposits
11,432,356
9,385,898
Total brokered deposits
1,254,479
2,534,078
Maturities for certificates of deposit are as follows:
Due within one year
2,294,984
Due in one year to two years
45,459
Due in two years to three years
10,308
Due in three years to four years
Due in four years to five years
Due in five years to six years
Certificates of deposit of $250,000 or more totaled $671.6 million and $694.8 million at June 30, 2025 and December 31, 2024, respectively.
34
Note 10: Borrowings
Borrowings comprised the following at June 30, 2025 and December 31, 2024:
Federal Reserve discount window borrowings
175,000
50,000
Subordinated debt
71,800
FHLB advances
3,680,588
4,172,030
Credit linked notes, net of debt discount
74,152
84,358
Other borrowings
7,934
Total borrowings
On May 27, 2025, the Company entered into an interest free, fixed-rate community development advance debt agreement with the FHLB. The balance of the advance was $2.5 million as of June 30, 2025, and the full principal balance matures on May 24, 2030.
On June 24, 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. The balance of the advance was $2.0 billion as of June 30, 2025, and matures on September 22, 2025. The variable interest rate is based on the Federal Funds effective rate, plus 15 basis points, which was 4.48% on June 30, 2025. The FHLB has a put option to cancel the agreement 60 days after the initial execution date and the Company has a call option to cancel the agreement at any time, with one day’s notice.
On June 30, 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. The balance of the advance was $1.7 billion as of June 30, 2025, and matures on September 29, 2025. The variable interest rate is based on the Federal Funds effective rate, plus 15 basis points, which was 4.48% on June 30, 2025. The FHLB has a put option to cancel the agreement 60 days after the initial execution date and the Company has a call option to cancel the agreement at any time, with one day’s notice.
Note 11: Derivative Financial Instruments
The Company uses non-hedging designated, derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities.
Internal Interest Rate Risk Management
The Company enters into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market and enters into forward contracts for the future delivery of mortgage loans to third party investors. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. Forward contracts and interest rate lock agreements are accounted for as derivatives at fair value with changes in fair value reflected in other income on the unaudited condensed consolidated statements of income.
Interest rate swaps are also used by the Company to reduce the risk that significant increases in interest rates may have on the value of certain fixed-rate loans held for sale and the respective loan payments received from borrowers. All changes in the fair market value of these interest rate swaps and associated loans held for sale have been
35
included in gain on sale of loans. Any difference between the fixed and floating interest rate components of these transactions have also been included in gain on sale.
The Company entered into a contract containing put options and interest rate floors on securities it acquired from a warehouse customer. These provide protection and offset losses in value of certain securities accounted for under the fair value option. The gain (loss) on the put options is substantially equal and offsetting to the fair market value adjustment of securities available for sale, resulting in an inconsequential net gain or loss in other noninterest income. This helps mitigate interest rate risk and minimizes impacts of market fluctuations on the securities available for sale that the Company elected to account for under the fair value option with changes in fair value reflected in earnings. The Company also entered into interest rate floor contracts with two warehouse loan customers to minimize interest rate risk. All changes in the fair market value of these options and floors have been included in other noninterest income.
Credit Risk Management
In March 2024, the Company entered into a contract as the buyer of credit protection through the credit derivative market. A CDS was purchased to manage credit risk associated with specific multi-family mortgage loans. Under the terms of the contract, the Company will be compensated for certain credit-related losses on a pool of multi-family mortgage loans. The protection seller has posted aggregate collateral of $64.8 million related to their obligations under the contract. The collateral is not included on the Company’s unaudited condensed consolidated balance sheets. There was no gain or loss associated with the credit default swap valuation as of June 30, 2025 and June 30, 2024. Any future changes in the fair market value of this instrument will be included in other noninterest expense.
The CDS is considered a derivative, but is not designated as an accounting hedge, and is recorded at fair value, with changes in fair value reflected in noninterest expense on the unaudited condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in other assets on the unaudited condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities on the unaudited condensed consolidated balance sheets.
The following table presents the notional amount and fair value of interest rate locks, forward contracts, interest rate swaps, put options, interest rate floors, and credit derivatives utilized by the Company at June 30, 2025 and December 31, 2024. These tables exclude the fair market value adjustment on loans commonly hedged with these derivatives.
Notional
Fair Value
Balance Sheet Location
Asset
Liability
Interest rate lock commitments
48,949
Other assets/liabilities
270
Forward contracts
51,847
427
Interest rate swaps
49,734
2,484
Put options
648,016
Other assets
45,055
Interest rate floors
1,144,335
6,118
Credit derivatives
64,184
53,927
435
36
24,609
176
33,000
229
49,891
4,199
680,354
43,777
1,228,274
4,043
58,526
52,278
The following table summarizes the periodic changes in the fair value of the above derivative financial instruments on the unaudited condensed consolidated statements of income for the three and six months ended June 30, 2025 and 2024.
Derivative (loss) gain included in gain on sale of loans:
224
(109)
408
(93)
Forward contracts (includes pair-off settlements)
(168)
285
(518)
379
(438)
247
(1,280)
1,622
Net (loss) gain
(382)
423
(1,390)
1,908
Derivative gain included in other income:
Put options (1)
7,522
3,467
11,080
4,333
214
2,075
2,548
Net gain
11,855
3,681
3,352
13,628
___________________________
The put option gain (loss) reflects an adjustment to the fair value of the derivative that is substantially equal and offset by an adjustment to the fair value of its related securities available for sale for which the Company elected to account for under the fair value option with changes in fair value reflected in earnings. The combination of these adjustments is designed to result in an inconsequential net gain or loss in other noninterest income.
Derivatives on Behalf of Customers
The Company offers derivative contracts to some customers in connection with their risk management needs. These derivatives include back-to-back interest rate swap, cap, and floor arrangements. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. These derivatives generally work together as an offsetting, economic interest rate hedge, but the Company does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred, typically resulting in no net earnings impact.
37
The fair values of derivative assets and liabilities related to back-to-back derivatives on behalf of customers with back-to-back interest rate swap, cap or floor arrangements were recorded on the unaudited condensed consolidated balance sheets as follows:
983,600
10,015
724,224
309
The gross gains and losses on these derivative assets and liabilities were recorded in other noninterest income and other noninterest expense in the unaudited condensed consolidated statements of income as follows:
Gross swap gains
5,162
5,371
9,706
2,538
Gross swap losses
Net swap gains (losses)
The Company pledged $7.5 million and $263,000 in collateral to secure its obligations under swap contracts at June 30, 2025 and December 31, 2024, respectively.
Note 12: Disclosures about Fair Value of Assets and Liabilities
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities
38
Recurring Measurements
The following tables present the fair value measurements of assets and liabilities recognized on the accompanying unaudited condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2025 and December 31, 2024:
Fair Value Measurements Using
Quoted Prices in
Significant
Active Markets
for Identical
Observable
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Mortgage-backed - Agency
Mortgage-backed - Agency - fair value option
Loans held for sale
91,930
Derivative assets:
Interest rate swaps, caps and floors (back-to-back)
8,845
36,210
Derivative liabilities:
78,170
12,481
31,296
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized on the accompanying unaudited condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the six months ended June 30, 2025 and the year ended December 31, 2024. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
The Company values its assets and liabilities in the principal market where it sells the particular asset or transfers the liability with the greatest volume and level of activity. In the absence of an active market, the value is based on the most advantageous market for the asset or liability.
Mortgage Loans in Process of Securitization, Securities Available for Sale, and Securities with a Fair Value Option Election
Where quoted market prices are available in an active market, securities such as U.S. Treasuries are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy including Federal Agencies, mortgage-backed securities, municipal securities and Federal Housing Administration participation certificates. In certain cases, if Level 1 or Level 2 inputs are not available, securities would be classified within Level 3 of the hierarchy.
Loans Held for Sale
Certain loans held for sale at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices, or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.
Servicing Rights
Servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed, cost of servicing, interest rates, and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy.
The Chief Financial Officer’s (CFO) office contracts with an independent pricing specialist to generate fair value estimates on a quarterly basis. The CFO’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with GAAP.
Derivative Financial Instruments
Interest rate lock commitments - The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices, estimates of the fair value of the servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of expenses. With respect to its interest rate lock commitments, management determined that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its interest rate lock commitments.
Forward sales commitments - The Company estimates the fair value of forward sales commitments based on market quotes of mortgage-backed security prices for securities similar to the ones used, which are considered Level 2.
Interest rate swaps, caps, and floors (back-to-back) – The Company estimates the fair value of these derivatives made in relation to specific contracts with customers based on prices that are obtained from a third party that uses observable market inputs, thereby supporting a Level 2 classification.
Interest rate swaps – The Company estimates the fair value of interest rate swaps based on prices that are obtained from a third party that uses observable market inputs, thereby supporting a Level 2 classification.
Put options - The fair value of put options is linked to securities available for sale that are accounted for using the fair value option and are classified as either Level 2 or Level 3 on the hierarchy. The put options are classified as Level 2 or Level 3 in the hierarchy, depending upon the magnitude of observable inputs in the valuation of the securities. These valuations are estimated by a third party.
Interest rate floors - The fair value of certain interest rate floors is linked to securities available for sale that are accounted for using the fair value option. Other interest rate floors are linked to loans with warehouse customers. The value of the interest rate floors is based on estimated discounted cash flows that are based on inputs that are not readily observable and, thus, are classified as Level 3 on the hierarchy. These valuations are estimated by a third party.
Credit Default Swap – The fair value of the CDS is linked to the value of its underlying mortgage loans. The Company estimates the fair value based on estimated discounted cash flows that are derived from inputs, including credit spreads that are not readily observable and, thus, are classified as Level 3 on the hierarchy. These valuations are estimated by a third party.
Level 3 Reconciliation
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized on the accompanying unaudited condensed consolidated balance sheets using significant unobservable (Level 3) inputs:
Three Months Ended June 30,
Six Months Ended June 30,
189,711
172,200
158,457
Purchased servicing
Originated servicing
5,244
3,761
8,582
5,927
Paydowns
(2,246)
(2,252)
(5,054)
(4,639)
Changes in fair value
258
5,067
(496)
19,031
178,776
Securities available for sale - Mortgage-backed - Non-Agency residential - fair value option
472,192
485,500
(7,884)
(16,870)
(1,681)
(6,003)
462,627
Derivative assets - put options
28,295
22,976
18,654
7,915
1,681
6,003
24,657
Derivative assets - interest rate floors
1,785
8,910
6,576
9,124
Derivative assets - interest rate lock commitments
126
174
140
Gain (loss) recognized
144
(4)
240
170
Derivative liabilities - interest rate lock commitments
(80)
105
123
127
42
Nonrecurring Measurements
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2025 and December 31, 2024.
Active Markets for
Other Observable
Identical Assets
Collateral dependent loans
194,337
59,915
Other real estate owned
7,313
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized on the accompanying unaudited condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Collateral Dependent Loans, Net of ACL-Loans
The estimated fair value of collateral dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral dependent loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be classified as substandard, collateral-dependent and subsequently as deemed necessary by the CCO’s office. Appraisals and evaluations are reviewed for accuracy and consistency by the CCO’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the CCO’s office by comparison to historical results.
Other Real Estate Owned
The estimated fair value of other real estate owned is usually based on the appraised fair value of the collateral or in certain circumstances on sales agreements, and in all cases net of estimated cost to sell. Other real estate owned is classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying other real estate owned are obtained when the loan is in the process of foreclosure and subsequently as deemed necessary by the CCO’s office. Appraisals and evaluations are reviewed for accuracy and consistency by the CCO’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated costs to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the CCO’s office by comparison to historical results.
43
Unobservable (Level 3) Inputs:
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.
Valuation
Weighted
Technique
Unobservable Inputs
Range
Average
At June 30, 2025:
Market comparable properties
Marketability discount and costs to sell
0% - 100%
14%
Servicing rights - Multi-family
152,100
Discounted cash flow
Discount rate
8% - 15%
9%
Constant prepayment rate
Earnings rate on escrows
3%
Servicing rights - Single-family
33,595
10% - 11%
10%
6% - 15%
7%
Servicing rights - Healthcare
3,214
13%
2% - 7%
4%
Servicing rights - SBA
4,128
16%
5% - 21%
Loan closing rates
59% - 100%
82%
Intrinsic value
Market credit spread
6% - 7%
At December 31, 2024:
0% - 90%
29%
2% - 8%
5%
146,483
34,986
6% - 14%
4,207
1% - 2%
1%
4,259
4% - 24%
71% - 99%
87%
6% - 8%
Sensitivity of Significant Unobservable Inputs
The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement, and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
44
Collateral Dependent Loans and Other Real Estate Owned
The significant unobservable inputs used in the fair value measurement of the Company’s collateral dependent loans and other real estate owned is based on liquidation amounts of the underlying collateral using the most recently available appraisals with adjustments made for a marketability discount and costs to sell.
The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights are discount rates and constant prepayment rates. These two inputs can drive a significant amount of a market participant’s valuation of servicing rights. Significant increases (decreases) in the discount rate or assumed constant prepayment rates used to value servicing rights would decrease (increase) the value derived.
The significant unobservable input used in the fair value measurement of certain put options include market credit spreads that can be impacted by market conditions and drive a significant amount of a market participant’s valuation of the put option and its related security. The impact of changes to the unobservable inputs for the put option is mitigated by changes to the observable inputs for the related security, which are valued in opposite directions, so as to minimize the financial impact to the Company.
The significant unobservable input used in the fair value measurement of interest rate floor derivatives associated with certain securities available for sale and loans include the discount rate that can have a significant impact on the value of the derivative. Another variable that affects the floor value is the forward interest curve, which is observable, but changes with market conditions as interest rates and future interest rate expectations change.
Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2025 and December 31, 2024.
Carrying
Financial assets:
Securities held to maturity
503,650
1,043,875
FHLB stock and other equity securities
187,850
30,000
4,013,835
Loans receivable, net
10,361,673
Financial liabilities:
12,689,577
10,336,084
2,353,493
3,680,257
Other borrowing
182,934
Credit linked notes
74,151
Interest payable
30,225
538,871
1,125,803
187,804
3,693,340
10,297,439
11,923,961
8,001,487
3,922,474
4,171,843
57,934
84,357
34,475
Note 13: Common Stock
Public Offerings of Common Stock:
On May 13, 2024, the Company issued 2,400,000 shares of the Company’s common stock, without par value, at a public offering price of $43.00 per share in an underwritten public offering. The aggregate gross offering proceeds for the shares issued by the Company was $103.2 million, and after deducting underwriting discounts, commissions, and offering expenses of $5.5 million paid to third parties, the Company received total net proceeds of $97.7 million.
Note 14: Preferred Stock
Public Offerings of Preferred Stock:
Series A Preferred Stock – On March 28, 2019, the Company issued 2,000,000 shares of 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $25 per share. The aggregate gross offering proceeds for the shares issued by the Company was $50.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $1.7 million paid to third parties, the Company received total net proceeds of $48.3 million. On April 12, 2019, the 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, resulting in an additional $2.0 million in net proceeds, after deducting $41,000 in underwriting discounts.
The Company redeemed all outstanding shares of the Series A Preferred Stock on April 1, 2024 at a price equal to the liquidation preference of $25 per share, or $52.0 million, using cash on hand.
The $1.8 million expenses associated with the original issuance, which were capitalized in 2019, were recognized through retained earnings upon redemption, thus reducing net income available to common shareholders.
Series B Preferred Stock – On August 19, 2019, the Company issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $125.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.2 million paid to third parties, the Company received total net proceeds of $120.8 million.
The Company redeemed all outstanding shares of the Series B Preferred Stock on January 2, 2025, at a price equal to the liquidation preference of $1,000 per share (equivalent to $25 per depositary share), or $125.0 million. The cash to redeem the shares was delivered to the Company’s transfer agent on December 31, 2024, resulting in a prepaid asset reported in other assets that was reversed upon redemption. As of the redemption date, the Series B Preferred Stock did not have any accrued, but unpaid dividends.
The $4.2 million expenses associated with the original issuance, which were capitalized in 2019, were recognized through retained earnings upon redemption, thus reducing net income available to common shareholders. Similarly, the redemption resulted in an excise tax of $1.2 million that will not be payable until 2025 taxes are due in 2026, and any future issuance of shares until one year after the redemption can offset the amount of excise tax that will be paid.
Series C Preferred Stock – On March 23, 2021, the Company issued 6,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series C Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000 per share (equivalent to $25 per
depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $150.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $5.1 million paid to third parties, the Company received total net proceeds of $144.9 million.
On May 6, 2021 the Company completed a private offering of 46,181 shares (1,847,233 depositary shares), which were also issued at a price of $25 per depositary share. The total capital raised from the private offering was $46.2 million, net of $23,000 in expenses.
The Series C Preferred Stock has no voting rights with respect to matters that generally require the approval of common shareholders. Dividends on the Series C Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series C Preferred Stock, in whole or in part, at its option, on any dividend payment date on or after April 1, 2026, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
Series D Preferred Stock – On September 27, 2022, the Company issued 5,200,000 depositary shares, each representing a 1/40th interest in a share of its 8.25% Fixed Rate Reset Series D Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $130.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.6 million paid to third parties, the Company received total net proceeds of $125.4 million. On September 30, 2022, the 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, resulting in an additional $12.1 million in net proceeds, after deducting $0.4 million in underwriting discounts.
The Series D Preferred Stock has no voting rights with respect to matters that generally require the approval of common shareholders. Dividends on the Series D Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series D Preferred Stock, in whole or in part, at its option, on any dividend payment date on or after October 1, 2027, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
Series E Preferred Stock – On November 25, 2024, the Company issued 9,200,000 depositary shares, each representing a 1/40th interest in a share of its 7.625% Fixed Rate Reset Series E Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $230.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $7.3 million paid to third parties, the Company received total net proceeds of $222.7 million.
The Series E Preferred Stock has no voting rights with respect to matters that generally require the approval of common shareholders. Dividends on the Series E Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series E Preferred Stock, in whole or in part, at its option, on any dividend payment date on or after January 1, 2030, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
48
Note 15: Share-Based Payment Plans
Equity-based incentive awards for Company officers are currently issued pursuant to the 2017 Equity Incentive Plan. The Company did not issue any shares during the three months ended June 30, 2025 and 2024. The Company issued 80,875 and 85,212 shares during the six months ended June 30, 2025 and 2024, respectively.
The Compensation Committee of the Board of Directors also approved a plan for non-executive directors to receive a portion of their annual retainer fees in the form of shares of common stock. As of January 1, 2024, they are to receive a portion of their annual fees, issued quarterly, in the form of restricted common stock equal to $70,000 per member, rounded up to the nearest whole share. Accordingly, there were 3,752 and 2,849 shares, issued to non-executive directors during the three months ended June 30, 2025 and 2024, respectively and there were 6,615 and 6,013 shares, issued to non-executive directors during the six months ended June 30, 2025 and 2024, respectively.
The Company also established an ESOP to provide shares of stock for all employees who meet certain requirements. There was no contribution to the ESOP during the three months ended June 30, 2025 and 2024. Expenses recognized for the contribution to the ESOP totaled $389,000 and $286,000 for the three months ended June 30, 2025 and 2024, respectively and totaled $726,000 and $573,000 for the six months ended June 30, 2025 and 2024, respectively. The Company contributed 30,802 shares and 23,414 shares to the ESOP for the six months ended June 30, 2025 and 2024, respectively.
Note 16: Earnings Per Share
Earnings per share were computed as follows for the three and six months ended June 30, 2025 and 2024:
Weighted-
Per
Net
Share
Income
Net income allocated to common shareholders
Basic earnings per share
Effect of dilutive securities-restricted stock awards
45,919
128,979
Diluted earnings per share
67,990
144,820
49
Note 17: Segment Information
The Company’s three reportable business segments are defined as Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. The reportable business segments are consistent with the internal reporting and evaluation of the principal lines of business of the Company. The Multi-family Mortgage Banking segment originates and services government sponsored mortgages for multi-family and healthcare facilities. It is also a fully integrated syndicator of low-income housing tax credit and debt funds. The Mortgage Warehousing segment funds agency eligible residential loans from the date of origination or purchase, until the date of sale in the secondary market, as well as commercial loans to non-depository financial institutions. The Banking segment provides a wide range of financial products and services to consumers and businesses, including retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. The Other segment includes general and administrative expenses that provide services to all segments; internal funds transfer pricing offsets resulting from allocations to/from the other segments, certain elimination entries and investments in qualified affordable housing limited partnerships or LLCs and certain debt funds. All operations are domestic.
The Company’s segments diversify the net income of Merchants Bank and provide synergies across the segments. Strategic opportunities come from MCC and MCS, where loans are funded by the Banking segment and the Banking segment provides Ginnie Mae custodial services to MCC and MCS. Low-income tax credit syndication and debt fund offerings complement the lending activities of new and existing multi-family mortgage customers. The securities available for sale and held to maturity funded by MCC custodial deposits or purchases of securitized loans originated by MCC are pledged to the FHLB to provide advance capacity during periods of high residential loan volume for Mortgage Warehousing. Mortgage Warehousing provides leads to Correspondent Lending in the Banking segment. Retail and commercial customers provide cross selling opportunities within the Banking segment. Merchants Mortgage is a risk mitigant to Mortgage Warehousing because it provides us with a ready platform to sell or refinance the underlying collateral to secure repayment. These and other synergies form a part of our strategic plan.
The reportable business segments are strategic business units that offer distinct, but complimentary, products and services. Due to the specialized nature of each segment and different resource requirements, they are managed separately.
The Company’s CODM is the president and chief operating officer. The CODM evaluates performance for all reportable segments based on net interest income, noninterest income, noninterest expense, and net income (loss). The CODM uses the above-mentioned metrics along with total assets in deciding how to allocate capital as well as human and financial resources among the segments. Major decisions are also made with input from segment leadership, the Board of Directors, and various management committees, as appropriate.
50
The tables below present selected business segment financial information for the three and six months ended June 30, 2025 and 2024.
Multi-family
Mortgage
Banking
Warehousing
Interest income
1,138
100,770
198,542
3,949
Interest expense
67,819
108,647
(806)
Net interest income
1,118
32,951
89,895
4,755
(345)
51,587
Net interest income after provision for credit losses
1,463
31,166
38,308
Noninterest income
44,752
6,820
3,283
(4,375)
Noninterest expense
33,569
8,395
23,363
12,010
Income (loss) before income taxes
12,646
29,591
18,228
(11,630)
Income taxes
3,377
6,605
3,654
(2,782)
Net income (loss)
9,269
22,986
14,574
(8,848)
487,853
6,999,701
11,404,488
249,162
Significant non-cash items:
Included in other noninterest income:
Servicing rights fair value adjustments
745
(487)
Derivative fair value adjustments
1,135
101,164
222,785
3,189
68,184
132,742
(792)
1,115
32,980
90,043
3,981
995
8,970
31,985
81,073
31,983
1,194
(3,572)
20,651
4,674
14,985
10,070
12,447
29,057
67,282
(9,661)
3,410
6,787
14,904
(2,369)
9,037
22,270
52,378
(7,292)
428,299
5,626,055
11,885,484
272,584
18,212,422
4,516
551
215
51
2,318
186,887
394,586
7,812
125,488
216,754
(1,594)
2,278
61,399
177,832
9,406
(393)
1,359
59,788
2,671
60,040
118,044
73,648
6,080
2,216
(7,771)
58,129
16,416
40,673
23,783
18,190
49,704
79,587
(22,148)
5,508
17,906
(5,621)
12,682
38,384
61,681
(16,527)
(1,690)
2,881
186,065
447,073
6,427
124,324
264,465
(1,558)
2,841
61,741
182,608
7,985
1,935
12,756
59,806
169,852
72,450
5,063
1,623
(6,911)
40,222
9,472
30,563
19,035
35,069
55,397
140,912
(17,961)
9,423
12,937
32,109
(4,499)
25,646
42,460
108,803
(13,462)
17,697
1,334
2,549
Note 18: Regulatory Matters
The Company and Merchants Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by federal and state banking regulators that, if undertaken, could have a direct material effect on the Company’s unaudited condensed consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Merchants Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Merchants Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Merchants Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, and other factors. Furthermore, the Company’s and Merchants Bank’s regulators could require adjustments to regulatory capital not reflected in these unaudited condensed consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Merchants Bank to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of June 30, 2025 and December 31, 2024, that the Company and Merchants Bank met all capital adequacy requirements. For additional information regarding dividend restrictions, see the Company’s 2024 Annual Report on Form 10–K.
As of June 30, 2025 and December 31, 2024, the most recent notifications from the Federal Reserve categorized the Company as well capitalized and most recent notifications from the FDIC categorized Merchants Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s or Merchants Bank’s category.
The Company’s and Merchants Bank’s actual capital amounts and ratios are presented in the following tables.
Minimum
Amount to be Well
Minimum Amount
Capitalized with
To Be Well
Actual
Basel III Buffer(1)
Capitalized(1)
Ratio
Total capital(1) (to risk-weighted assets)
Company
2,280,183
13.4
1,788,568
10.5
Merchants Bank
2,233,591
13.1
1,787,326
1,702,216
10.0
Tier I capital(1) (to risk-weighted assets)
2,176,150
12.8
1,447,889
8.5
2,129,558
12.5
1,446,883
1,361,772
8.0
Common Equity Tier I capital(1) (to risk-weighted assets)
1,624,860
9.5
1,192,379
7.0
1,191,551
1,106,440
6.5
Tier I capital(1) (to average assets)
11.5
948,810
5.0
11.3
945,850
53
2,334,479
13.9
1,767,835
2,165,193
12.9
1,763,982
1,679,983
2,234,658
13.3
1,431,105
2,065,372
12.3
1,427,985
1,343,986
1,562,524
9.3
1,178,557
1,175,988
1,091,989
12.1
925,180
11.2
922,006
Memorandum of Understanding
On June 30, 2025, the Bank entered into a confidential MOU with the FDIC and DFI. While the contents of the MOU are confidential under DFI and FDIC regulations, certain provisions, with the authorization of the DFI and FDIC, are summarized below. The MOU is an informal administrative agreement among the Bank, FDIC, and DFI pursuant to which the Bank has agreed to take various actions and enhance specific areas of the Bank’s operations. In particular, the Bank has agreed to maintain certain capital thresholds, manage asset concentrations, and implement certain plans regarding the Bank’s operations and strategy to mitigate risk of certain assets, which it has already implemented. As of the date of this report, and as of each of the periods ending March 31, 2025 and December 31, 2024, the Bank’s capital exceeded the levels agreed to in the MOU and the Bank was within the asset concentration limits agreed to in the MOU. The MOU will remain in effect until modified or terminated by the FDIC and DFI.
The Company’s principal source of funds for dividend payments to shareholders is dividends received from the Bank. Banking statutes and regulations limit the maximum amount of dividends that a bank may pay without requesting prior approval of regulatory agencies. Under Indiana law, the Bank may not pay a dividend if such dividend would be greater than retained net income (as defined) for the current year plus those for the previous two years. Additionally, under the MOU, if the Bank’s capital ratios fall below the minimums agreed to, the Bank may not pay dividends without the FDIC and DFI’s prior consent.
Management does not expect the actions called for by these regulatory actions to have a material adverse impact on the Company’s financial performance or the Bank’s ongoing day-to-day operations, although they may have the effect of limiting or delaying the Company’s or the Bank’s ability or plans to expand.
54
Forward-Looking Statements
Certain statements in this Form 10-Q, including, but not limited to, statements within Management’s Discussion and Analysis of Financial Condition and Results of Operations, are “forward-looking statements” within the meaning of the rules and regulations of the SEC. These forward-looking statements reflect our current views with respect to, among other things, future events and our 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 our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution 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 we believe 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 our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2024 or “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q or the following:
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The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition at June 30, 2025 and results of operations for the three and six months ended June 30, 2025 and 2024, is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this Form 10-Q.
The words “the Company,” “we,” “our” and “us” refer to Merchants Bancorp and its consolidated subsidiaries, unless we indicate otherwise.
Regulatory Developments Regarding the Bancorp and Bank
Memorandum of Understanding. On June 30, 2025, the Bank entered into a confidential MOU with the FDIC and DFI. While the contents of the MOU are confidential under DFI and FDIC regulations, certain provisions, with the authorization of the DFI and FDIC, are summarized below. The MOU is an informal administrative agreement among the Bank, FDIC, and DFI pursuant to which the Bank has agreed to take various actions and enhance specific areas of the Bank’s operations. In particular, the Bank has agreed to maintain certain capital thresholds, manage asset concentrations, and implement certain plans regarding the Bank’s operations and strategy to mitigate risk of certain assets, which it has already implemented. As of the date of this report, and as of each of the periods ending March 31, 2025 and December 31, 2024, the Bank’s capital exceeded the levels agreed to in the MOU and the Bank was within the asset concentration limits agreed to in the MOU. The MOU will remain in effect until modified or terminated by the FDIC and DFI.
Financial Highlights for the Three Months Ended June 30, 2025
Business Overview
We are a diversified bank holding company headquartered in Carmel, Indiana and registered under the Bank Holding Company Act of 1956, as amended. We currently operate in multiple business segments, including Multi-family Mortgage Banking that offers multi-family housing and healthcare facility financing and servicing, as well as syndicated low-income housing tax credit and debt funds; Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers portfolio lending for multi-family and healthcare facility loans, retail and correspondent residential mortgage banking, agricultural lending, SBA lending, and traditional community banking.
Our business consists of funding low risk, multi-family, residential, and SBA loans meeting underwriting standards of government programs under an originate to sell model, and retaining adjustable-rate loans as held for investment to reduce interest rate risk. The gain on sale of these loans and servicing fees contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, brokered deposits, and short-term borrowing. We believe that the combination of net interest income and noninterest income from the sale of low risk profile assets results in lower than industry charge-offs and a lower expense base, which serves to maximize net income and provide higher than industry shareholder return.
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Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The estimates and judgments that management believes have the most effect on its reported financial position and results of operations are set forth within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since those reported for the year ended December 31, 2024.
Financial Condition
As of June 30, 2025, we had approximately $19.1 billion in total assets, $12.7 billion in deposits and $2.2 billion in total shareholders’ equity. Total assets as of June 30, 2025 included $10.4 billion of loans receivable, net of ACL-Loans, and $4.1 billion of loans held for sale. There were also $1.5 billion in securities classified as held to maturity. We had $936.3 million in securities available for sale, the majority of which were acquired from a warehouse customer, and others are match funded with related custodial deposits or required to collateralize our credit-linked notes. There are some restrictions on the types of securities we hold, particularly for those that are funded by certain multi-family custodial deposits where we set the cost of deposits based on the yield of the related security. Additionally, we had $647.2 million of cash and cash equivalents, other assets of $495.3 million, which primarily related to low-income housing tax credits, and $402.4 million of mortgage loans in process of securitization that represent pre-sold multi-family rental real estate loan originations in primarily Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities pending settlements that typically occur within 30 days. Servicing rights at June 30, 2025 were $193.0 million based on the fair value of the loan servicing, which primarily includes Ginnie Mae multi-family servicing rights with 10-year call protection.
Comparison of Financial Condition at June 30, 2025 and December 31, 2024
Total Assets. Total assets of $19.1 billion at June 30, 2025 increased $335.5 million, or 2%, compared to $18.8 billion at December 31, 2024. The increase was due primarily to growth in loans held for sale and in the warehouse and multi-family loan portfolios. Total loan balances grew by 2% even after two loan sales during the three months ended June 30, 2025 totaling over $685.4 million related to securitizations.
Cash and Cash Equivalents. Cash and cash equivalents of $647.2 million at June 30, 2025 increased $170.6 million, or 36%, compared to $476.6 million at December 31, 2024. Included in cash equivalents was $43.8 million in restricted cash associated with senior credit linked notes described in Note 1: Basis of Presentation in this Form 10-Q and Note 1: Basis of Presentation and Note 10: Borrowings and the Company’s 2024 Annual Report on Form 10–K.
Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization of $402.4 million at June 30, 2025 decreased $25.8 million, or 6%, compared to $428.2 million at December 31, 2024. These represent loans that our banking subsidiary, Merchants Bank, has originated or funded and are held in the loan portfolio pending settlement, as primarily Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities with a firm investor commitment to purchase the securities.
Securities Available for Sale. Securities available for sale of $936.3 million at June 30, 2025 decreased $43.7 million, or 4%, compared to December 31, 2024. The decrease in securities available for sale was primarily due to
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$391.8 million in calls, maturities, repayments and other adjustments, partially offset by purchases of $348.1 million during the period.
Included in securities available for sale were $603.0 million and $635.9 million of investments at June 30, 2025 and December 31, 2024, respectively, for which a fair value option was elected. Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the unaudited condensed consolidated balance sheets with changes in the fair value recognized in earnings as they occur.
As of June 30, 2025, AOCL of $0.2 million, related to securities available for sale, increased $0.1 million, or 86%, compared to accumulated losses of $0.1 million at December 31, 2024. The $0.2 million of AOCL as of June 30, 2025 represented less than 1% of total equity and 1% of total securities available for sale, reflecting our interest rate risk policy of maintaining short duration on assets and liabilities.
Securities Held to Maturity. Securities held to maturity of $1.5 billion at June 30, 2025 decreased $116.5 million, or 7%, compared to $1.7 billion at December 31, 2024. The decrease was due to repayments and amortization during the period.
Loans Held for Sale. Loans held for sale of $4.1 billion at June 30, 2025 increased $334.3 million, or 9%, compared to $3.8 billion at December 31, 2024. The increase in loans held for sale was due primarily to an increase in warehouse participations, as we experienced higher volume. Loans held for sale are comprised primarily of single-family residential real estate loan participations that meet Fannie Mae, Freddie Mac, or Ginnie Mae eligibility. It also includes some multi-family loans that are expected to be sold or securitized in the future.
Loans Receivable, Net. Loans receivable, net of ACL-Loans, of $10.4 billion at June 30, 2025, increased $78.1 million, or 1%, compared to December 31, 2024. The increase in net loans was comprised primarily of:
As of June 30, 2025, approximately 95% of total loans reprice within three months, which reduces the risk of market rate increases.
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The Company is a nationwide lender, especially in our largest portfolios of multi-family and healthcare financing. The table below provides loan receivable data for these two portfolios, including the five highest geographic concentrations.
Healthcare
State
% of Total
1,244,946
Michigan
347,464
New York
650,800
Ohio
254,783
251,923
Texas
124,152
Georgia
233,565
South Carolina
102,500
California
233,409
New Jersey
88,668
Other states (1)
2,218,905
524,528
1,446,658
395,867
482,873
314,475
274,738
215,134
102,338
185,133
89,793
2,019,763
479,510
ACL-Loans. The ACL-Loans of $91.8 million at June 30, 2025 increased $7.4 million, or 9%, compared to $84.4 million at December 31, 2024. The increase compared to December 31, 2024 was driven by $64.0 million increase in provision expense that was partially offset by $56.6 million in charge-offs, primarily related to the multi-family portfolio. The increases in provision expenses and charge-offs were primarily associated with estimated 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 subordinated 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.
Goodwill. Goodwill of $8.0 million at June 30, 2025 was unchanged compared to December 31, 2024.
Servicing Rights. Servicing rights of $193.0 million at June 30, 2025 increased $3.1 million, or 2%, compared to $189.9 million at December 31, 2024. During the six months ended June 30, 2025, originated and purchased servicing of $8.7 million was partially offset by paydowns of $5.1 million and a negative fair market value adjustment of $0.5 million. The $0.5 million negative fair market value adjustment reflected a positive fair market value adjustment of $1.2 million for multi-family mortgages and a negative fair market value adjustment of $1.7 million for single-family mortgages and SBA loans during the six months ended June 30, 2025.
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Servicing rights are recognized in connection with sales of loans when we retain servicing of the sold loans. The servicing rights are recorded and carried at fair value. The fair value decrease recorded during the six months ended June 30, 2025 was driven by lower interest rates that impacted fair market value adjustments. The value of servicing rights generally increases in rising interest rate environments and declines in falling interest rate environments due to expected prepayments and is also influenced by earnings rates on escrow deposits.
Other Assets and Receivables. Other assets and receivables of $495.3 million at June 30, 2025 decreased $76.0 million, or 13%, compared to $571.3 million at December 31, 2024. The decrease was primarily due to a $125.0 million prepaid asset at December 31, 2024 that was released for the January 2, 2025 redemption of Series B Preferred Stock, partially offset by the increase in low income housing tax credits.
Deposits. Deposits of $12.7 billion at June 30, 2025 increased $766.9 million, or 6%, compared to $11.9 billion at December 31, 2024. The increase was primarily due to an increase of $2.1 billion in demand deposits and $260.7 million in savings deposits, partially offset by a decrease of $1.6 billion in certificates of deposit. As of June 30, 2025, approximately 83% of the total deposits reprice within three months.
Core deposits increased by $2.0 billion, or 22%, to $11.4 billion at June 30, 2025 compared to $9.4 billion at December 31, 2024. Core deposits represented 90% of total deposits at June 30, 2025 compared to 79% of total deposits at December 31, 2024.
We have decreased our use of brokered deposits by 50%, to $1.3 billion at June 30, 2025 compared to $2.5 billion at December 31, 2024. Brokered deposits represented 10% of total deposits at June 30, 2025 compared to 21% of total deposits at December 31, 2024. As of June 30, 2025, brokered certificates of deposit had a weighted average remaining duration of 48 days.
Compared to December 31, 2024, interest-bearing deposits increased $690.3 million, or 6%, to $12.4 billion at June 30, 2025, and noninterest-bearing deposits increased $76.5 million, or 32%, to $315.5 million at June 30, 2025.
Uninsured deposits totaled approximately $3.1 billion as of June 30, 2025, representing 24% of total Bank deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.4 billion and $1.6 billion as of June 30, 2025 and December 31, 2024, respectively.
Borrowings. Borrowings of $4.0 billion at June 30, 2025 decreased $376.6 million, or 9%, compared to $4.4 billion at December 31, 2024. The decrease was primarily due to a reduction of $491.4 million in FHLB advances, partially offset by an increase of $125.0 million in the usage of the Federal Reserve’s discount window. The Company primarily utilizes borrowing facilities from the FHLB, the Federal Reserve’s discount window, and AFX, using the most cost-effective options available. See Note 10: Borrowings for further information.
The Company continues to have significant borrowing capacity based on available collateral. As of June 30, 2025, unused lines of credit totaled $5.0 billion, compared to $4.3 billion at December 31, 2024. The Company’s ratio of total collateralized borrowing capacity to total assets remained at 46% from December 31, 2024 compared to June 30, 2025.
Other Liabilities. Other Liabilities of $231.0 million at June 30, 2025 were essentially unchanged compared to December 31, 2024.
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Total Shareholders’ Equity. Total shareholders’ equity of $2.2 billion at June 30, 2025, decreased $58.7 million, or 3%, compared to December 31, 2024. The decrease resulted primarily from the redemption of 6% Series B Preferred Stock for $125.0 million and dividends paid on common and preferred shares of $29.7 million during the period, which were partially offset by net income of $96.2 million. See Note 14: Preferred Stock for more details on the Series B redemption.
Asset Quality
Loans are underwritten to strict Freddie Mac, Fannie Mae, HUD, or other Agency guidelines. We continually strive to strengthen our various levels of credit and risk management.
The allowance for credit losses on loans of $91.8 million, as of June 30, 2025, increased by $7.4 million, or 9%, compared to December 31, 2024. The $7.4 million increase compared to December 31, 2024 was driven by $64.0 million increase in provision expense that was partially offset by $56.6 million in loan charge-offs. The increases in provision expenses and charge-offs compared to the period was primarily associated with estimated 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 subordinated 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.
During the three months ended June 30, 2025 there were $46.1 million of charge-offs and no recoveries, compared to $3.5 million of charge-offs and $15,000 recoveries for the three months ended June 30, 2024.
For the six months ended June 30, 2025, there were $56.6 million of charge-offs and $28,000 of recoveries, compared to $4.4 million of charge-offs and $16,000 of recoveries for the six months ended June 30, 2024.
During the three months ended June 30, 2025, after months of seeking legal remedies, the Company obtained additional access and information, such as through court appointed receivers, to assess the collateral supporting its challenged loans. The evaluation of this information contributed to an increase in loans classified as substandard, bringing the total to $417.7 million compared to $317.3 million as of December 31, 2024.
Loans receivable classified as Special Mention totaled $171.5 million at June 30, 2025, compared to $380.0 million at December 31, 2024 and $244.0 million at June 30, 2024. These declines reinforce the view that the frequency of migration to criticized status has subsided.
Total loans receivable greater than 30 days past due were $279.0 million at June 30, 2025, $292.3 million at December 31, 2024, and $234.8 million at June 30, 2024.
As of June 30, 2025, all substandard loans have been evaluated for credit losses and these loans have specific reserves of $30.8 million, of which $9.9 million was added during the three months ended June 30, 2025, net of charge-offs. The Company believes that its loan portfolio remains well collateralized.
Total nonperforming loans (nonaccrual and greater than 90 days past due but still accruing) were $251.5 million, or 2.39%, of total loans receivable at June 30, 2025, compared to $279.7 million, or 2.68%, of total loans at December 31, 2024 and $143.5 million, or 1.30%, at June 30, 2024. After six months of consecutive loan performance, the loans are placed back on accrual status.
As a percentage of nonperforming loans, the ACL-Loans was 37% at June 30, 2025 compared to 30% at December 31, 2024 and 56% at June 30, 2024. The changes compared to both periods were primarily due to a decrease in nonperforming loans and an increase in ACL-Loans.
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The Company has been making additional efforts to reduce its credit risk through loan sale and securitization activities since 2019. In March of 2023, as well as March and December of 2024, the Company strategically executed credit protection arrangements through a credit linked note and credit default swaps. The Company also upsized an existing credit default swap in June 2025 by $800.0 million. These credit protection arrangements totaled $3.7 billion in loans to reduce risk of losses, with incremental coverage ranging from 13-14% 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 June 30, 2025, the balance of loans subject to credit protection arrangements was $2.8 billion, compared to $2.3 billion as of December 31, 2024. For additional information see Note 11: Derivative Financial Instruments and the Company’s 2024 Annual Report on Form 10–K
The percentage of commercial real estate loans as a percentage of total Tier I risk-based capital, including the ACL-Loans, has declined from 348% to 328% from December 31, 2024 to June 30, 2025, respectively.
Comparison of Operating Results for the Three Months Ended June 30, 2025 and 2024
General. Net income of $38.0 million for the three months ended June 30, 2025 decreased by $38.4 million, or 50%, compared to the three months ended June 30, 2024, reflecting a $43.1 million, or 432%, increase in provision for credit losses. The increase in provision for credit losses was primarily associated with estimated declines on multi-family property values, after receiving new appraisals, and the ongoing investigation of borrowers involved in mortgage fraud or suspected fraud. The decrease in net income also reflected a $27.0 million, or 54%, increase in noninterest expense that was partially offset by a $19.1 million, or 61%, increase in noninterest income, and an $11.9 million, or 52%, decrease in provision for income tax. Of the $38.4 million decrease in net income, $691,000, or $0.01 per diluted common share, was attributable to changes in valuation adjustments. Noninterest income included positive fair market value adjustments of $258,000 to servicing rights and $4.3 million to derivatives, which compared to positive fair market value adjustments of $5.1 million to servicing rights and $215,000 to derivatives, in the three months ended June 30, 2024.
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The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.
Interest
Income/
Yield/
Balance
Expense
Rate
Assets:
Interest-earning deposits, and other interest or dividends
539,357
8,193
6.09
438,445
6,225
5.71
Securities available for sale
955,186
5.08
1,039,388
5.72
1,572,186
5.91
1,160,170
6.86
376,904
5.64
234,706
5.22
Loans and loans held for sale
14,826,151
6.92
14,347,165
7.97
Total interest-earning assets
18,269,784
6.68
17,219,874
7.67
Allowance for credit losses on loans
(90,860)
(76,456)
Noninterest-earning assets
806,001
670,773
18,984,925
17,814,191
Liabilities/Equity:
Interest-bearing checking
6,161,736
60,845
3.96
4,935,123
58,128
4.74
Savings deposits
145,162
0.02
145,262
0.05
Money market
3,354,820
4.20
2,788,335
33,207
4.79
Certificates of deposit
3,090,250
35,385
4.59
6,535,651
88,297
5.43
12,751,968
4.13
14,404,371
5.02
3,453,960
44,305
5.15
1,031,180
20,503
8.00
Total interest-bearing liabilities
16,205,928
4.35
15,435,551
376,217
331,246
Noninterest-bearing liabilities
200,944
222,664
16,783,089
15,989,461
Equity
2,201,836
1,824,730
Total liabilities and equity
Interest rate spread
2.33
2.45
Net interest-earning assets
2,063,856
1,784,323
Net interest margin
2.83
2.99
Average interest-earning assets to average interest-bearing liabilities
112.74
111.56
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Yields have been calculated on a pre-tax basis.
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The following table summarizes the increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates:
compared to June 30, 2024
Increase (Decrease)
Due to
Volume
1,433
535
1,968
(1,198)
(1,491)
(2,689)
7,031
(3,664)
3,367
1,844
416
2,260
9,496
(38,276)
(28,780)
18,606
(42,480)
(23,874)
14,448
(11,731)
2,717
(11)
Money market deposits
6,746
(4,816)
1,930
(46,548)
(6,364)
(52,912)
Total Deposits
(25,354)
(22,922)
(48,276)
48,172
(24,370)
23,802
22,818
(47,292)
(24,474)
(4,212)
4,812
600
Net Interest Income. Net interest income of $128.7 million for the three months ended June 30, 2025 increased $0.6 million, compared with $128.1 million for the three months ended June 30, 2024. The increase reflected lower interest expense on deposits that was partially offset by lower interest income and higher interest expense on borrowings.
The interest rate spread of 2.33% for the three months ended June 30, 2025 decreased 12 basis points compared to 2.45% for the three months ended June 30, 2024. Our net interest margin decreased 16 basis points, to 2.83% for the three months ended June 30, 2025 compared to 2.99% for the three months ended June 30, 2024. 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 $622.7 million, or 18%, and warehouse repurchase agreements grew by $473.8 million, or 35%, while other higher-margin loans receivable balances contracted by a net of $964.1 million.
Interest Income. Interest income of $304.4 million for the three months ended June 30, 2025 decreased $23.9 million, or 7%, compared with $328.3 million for the three months ended June 30, 2024. This decrease primarily reflected lower average yields on higher average balances on loans and loans held for sale.
Interest income of $255.6 million on loans and loans held for sale for the three months ended June 30, 2025, decreased $28.8 million, or 10%, compared to $284.4 million for the three months ended June 30, 2024. The average loan balance of $14.8 billion for the three months ended June 30, 2025 increased $479.0 million, or 3%, compared to $14.3 billion for the three months ended June 30, 2024. The average yield on loans and loans held for sale decreased 105 basis points, to 6.92% for the three months ended June 30, 2025, compared to 7.97% for the three months ended June 30, 2024.
Interest income of $12.1 million on securities available for sale for the three months ended June 30, 2025, decreased $2.7 million, or 18%, compared to $14.8 million for the three months ended June 30, 2024. The average balance of $955.2 million decreased $84.2 million, or 8%, compared to $1.0 billion for the three months ended
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June 30, 2024. The average yield decreased 64 basis points, to 5.08% for the three months ended June 30, 2025, compared to 5.72% for the three months ended June 30, 2024.
Interest income of $23.2 million on securities held to maturity for the three months ended June 30, 2025, increased $3.4 million, or 17%, compared to $19.8 million for the three months ended June 30, 2024. The average balance of $1.6 billion increased $412.0 million, or 36%, compared to $1.2 billion for the three months ended June 30, 2024. The average yield decreased 95 basis points, to 5.91% for the three months ended June 30, 2025, compared to 6.86% for the three months ended June 30, 2024. The increase in average balances was primarily due to purchases of senior investment securities backed by residential and healthcare loans retained as part of credit risk transfer securitization transactions originated by the Company.
Interest income of $5.3 million on mortgage loans in process of securitization for the three months ended June 30, 2025, increased $2.3 million, or 74%, compared to $3.0 million for the three months ended June 30, 2024. The average balance of $376.9 million increased $142.2 million, or 61%, compared to $234.7 million for the three months ended June 30, 2024. The average yield increased 42 basis points, to 5.64% for the three months ended June 30, 2025, compared to 5.22% for the three months ended June 30, 2024. The increase in average balance was primarily due to a higher origination volume of loans pending settlement for sale on the secondary market.
Interest Expense. Total interest expense of $175.7 million for the three months ended June 30, 2025, decreased $24.5 million, or 12%, compared to $200.2 million for the three months ended June 30, 2024. The decrease reflected lower average balances at lower average rates on certificates of deposit that were partially offset by higher average balances at lower average rates on borrowings.
Interest expense on deposits of $131.4 million decreased $48.3 million, or 27%, for the three months ended June 30, 2025, compared to $179.7 million for the three months ended June 30, 2024. The decrease primarily reflected lower average balances at lower average rates on certificates of deposit.
Interest expense of $35.4 million on certificates of deposit for the three months ended June 30, 2025, decreased $52.9 million, or 60%, compared to $88.3 million for the three months ended June 30, 2024. The decrease reflected lower average balances at lower rates. The average balance of $3.1 billion for the three months ended June 30, 2025, decreased $3.4 billion or 53%, compared to $6.5 billion for the three months ended June 30, 2024. The average interest rate decreased 84 basis points to 4.59% for the three months ended June 30, 2025, compared to 5.43% for three months ended June 30, 2024.
Interest expense of $60.8 million on interest-bearing checking accounts for the three months ended June 30, 2025, increased $2.7 million, or 5%, compared to $58.1 million for the three months ended June 30, 2024. The increase reflected higher average balances at lower rates. The average balance of $6.2 billion for the three months ended June 30, 2025, increased $1.2 billion, or 25%, compared to the three months ended June 30, 2024. The average interest rate decreased 78 basis points to 3.96% for the three months ended June 30, 2025, compared to 4.74% for three months ended June 30, 2024.
Interest expense of $44.3 million on borrowings for the three months ended June 30, 2025, increased $23.8 million, or 116%, compared to $20.5 million for the three months ended June 30, 2024. The increase was primarily due to higher average balances at lower rates of FHLB borrowings. There was a $2.4 billion, or 235%, increase in overall average borrowings to $3.5 billion at June 30, 2025, compared to $1.0 billion for the three months ended June 30, 2024. The average interest rate decreased 285 basis points to 5.15% for the three months ended June 30, 2025, compared to 8.00% for the three months ended June 30, 2024.
Included in interest expense on borrowings, our warehouse structured financing agreements provide for an additional interest payment for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 4.92% and 7.53%, to an effective rate of 5.15% and 8.00% for the three months ended June 30, 2025 and 2024, respectively.
67
Provision for Credit Losses. We recorded a provision for credit losses of $53.0 million for the three months ended June 30, 2025, an increase of $43.1 million, or 432%, over the three months ended June 30, 2024.
The $53.0 million provision for credit losses consisted of $54.5 million for the ACL-Loans, net of a release of $1.1 million for the ACL-OBCE’s and $0.3 million for the release of reserves on the ACL-Guarantees, related to a loan securitization.
The ACL-Loans was $91.8 million, or 0.87% of total loans, at June 30, 2025, compared to $84.4 million, or 0.81% of total loans, at December 31, 2024, and $81.0 million, or 0.74%, at June 30, 2024. The increase compared to December 31, 2024 was driven by a $64.0 million increase in provision expense, primarily related to the multi-family portfolio, which was offset by $56.6 million in charge-offs. The increase compared to June 30, 2024 was primarily related an increase in provision expense for loans in the multi-family portfolio, which were partially offset by charge-offs. Additional details are provided in the Asset Quality portion of the Comparison of Financial Condition at June 30, 2025 and December 31, 2024 and in Note 4: Loans and Allowance for Credit Losses on Loans.
Noninterest Income.
Change Amount
Change %
Noninterest income:
$ 23,342
$ 11,168
$ 12,174
109%
(4,689)
(43)%
515
34%
6,474
200%
4,655
101%
$ 50,480
$ 31,351
$ 19,129
61%
Noninterest income of $50.5 million for the three months ended June 30, 2025 increased $19.1 million, or 61%, compared to $31.4 million for the three months ended June 30, 2024. The increase was primarily due to a $12.2 million, or 109%, increase in gain on sale of loans, a $6.5 million, or 200%, increase in syndication and asset management fees, and a $4.7 million, or 101%, increase in other income, partially offset by a $4.7 million, or 43%, decrease in loan servicing fees.
The $12.2 million, or 109%, increase in gain on sale of loans resulted from higher volume in the multi-family loan portfolio.
A summary of the gain on sale of loans for the three months ended June 30, 2025 and 2024 is below:
Gain on Sale of Loans
Loan Type:
19,815
9,083
10,732
118%
Single-family
2,428
524
1,904
363%
SBA
1,099
1,561
(462)
(30)%
12,174
68
Syndication and asset management fees of $9.7 million for the three months ended June 30, 2025, increased $6.5 million, or 200%, compared to $3.2 million for the three months ended June 30, 2024. The increase was attributable to an increase in the amount of projects and funds managed in combination with new equity raises by our LIHTC syndication platform during the three months ended June 30, 2025 than the prior year.
Other noninterest income of $9.3 million for the three months ended June 30, 2025 increased $4.7 million, or 101%, compared to $4.6 million for the three months ended June 30, 2024. Other noninterest income included a $4.3 million positive adjustment to the fair value of floor derivatives for the three months ended June 30, 2025 compared to a $0.2 million positive fair value adjustment for the three months ended June 30, 2024. The floor derivatives are associated with arrangements whereby there is a guaranteed minimum interest rate the Company will receive on certain assets bearing variable interest rates. The change in value was driven largely by the change in market interest rates during the period. Also included in other noninterest income were changes in fair value on certain securities available for sale that the Company elected to account for under the fair value option, with changes in fair value reflected in earnings. The Company also has put options associated with these securities that provide protection against any change in value. By design, the fair value adjustments of the securities and the put options should be substantially equal and offsetting. For the three months ended June 30, 2025 there was a $7.5 million negative fair value adjustment on the securities that were offset by a $7.5 million positive fair value adjustment on the put options, hence having no net gain or loss recognized. Also see Note 2: Investment Securities, Note 11: Derivative Financial Instruments, and Note 12: Disclosures about Fair Value of Assets and Liabilities.
Loan servicing fees included a $0.3 million positive fair market value adjustment to servicing rights for the three months ended June 30, 2025, compared to a $5.1 million positive fair market value adjustment to servicing rights for the three months ended June 30, 2024.
Noninterest Expense.
Noninterest expense:
$ 43,566
$ 28,373
$ 15,193
54%
149
15%
255
11%
(397)
(11)%
1,573
28%
587
32%
2,473
108%
7,124
130%
$ 77,337
$ 50,380
$ 26,957
Noninterest expense of $77.3 million for the three months ended June 30, 2025 increased $27.0 million, or 54%, compared to the three months ended June 30, 2024. The increase was due primarily to a due to a $15.2 million, or 54%, increase in salaries and employee benefits to support business growth, including $5.8 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 as well. A significant contributor to the increased expenses during the period was a $7.1 million rise in other expenses, primarily related to taxes, insurance, receiver expenses, and legal fees tied to preserving collateral for nonperforming loans. Additionally, noninterest expenses rose due to a $2.5 million increase in credit risk transfer premium expenses, stemming from credit default swaps executed in March and December 2024, and a swap upsize in June 2025. Deposit insurance expenses also grew by $1.6 million, or 28%, driven by a rise in underperforming assets and overall asset growth.
69
The efficiency ratio was at 43.16% for the three months ended June 30, 2025, compared with 31.59% for the three months ended June 30, 2024. The $16.9 million in total expenses associated with credit default swap premiums, the collateral preservation of nonperforming loans, and the addition of production staff had a negative 941 basis point impact on the efficiency ratio for the three months ended June 30, 2025.
Income Taxes. Income tax expense of $10.9 million for the three months ended June 30, 2025 decreased $11.9 million, or 52%, compared to the three months ended June 30, 2024, primarily due to a 51% decrease in pretax income period to period. The effective tax rate was 22.2% for the three months ended June 30, 2025 and 22.9% for the three months ended June 30, 2024.
Comparison of Operating Results for the Six Months Ended June 30, 2025 and 2024
General. Net income of $96.2 million for the six months ended June 30, 2025 decreased $67.2 million, or 41%, compared to the six months ended June 30, 2024. The decrease was primarily due to a $46.1 million increase in the provision for credit losses, a $39.7 million increase in noninterest expense, and a $4.3 million decrease in net interest income, partially offset by a $20.9 million decrease in the provision for income taxes and a $1.9 million increase in noninterest income.
Interest-bearing deposits, and other
525,295
15,658
6.01
392,297
6.03
958,109
1,062,251
5.52
1,607,747
5.96
1,178,401
6.88
327,440
5.57
186,298
5.14
14,291,643
6.98
13,921,063
8.04
17,710,234
6.74
16,740,310
7.72
(88,797)
(74,000)
790,186
637,322
18,411,623
17,303,632
5,644,414
111,454
3.98
5,002,758
118,816
4.78
145,757
0.03
173,561
0.28
3,376,524
69,643
4.16
2,802,859
66,850
4.80
3,228,989
74,196
4.63
6,115,292
164,769
5.42
12,395,684
4.15
14,094,470
5.00
3,290,854
85,372
5.23
874,017
36,598
8.42
15,686,538
4.38
14,968,487
5.20
335,459
331,709
208,509
217,241
16,230,506
15,517,437
2,181,117
1,786,195
2.36
2.52
2,023,696
1,771,823
2.86
3.07
112.90
111.84
71
3,990
(102)
3,888
(2,860)
(1,859)
(4,719)
(7,488)
7,203
3,609
674
4,283
14,812
(76,310)
(61,498)
34,242
(85,085)
(50,843)
15,239
(22,601)
(7,362)
(38)
(177)
(215)
13,682
(10,889)
2,793
(77,768)
(12,805)
(90,573)
(48,885)
(46,472)
(95,357)
101,201
(52,427)
48,774
52,316
(98,899)
(46,583)
(18,074)
13,814
(4,260)
Net Interest Income. Net interest income of $250.9 million for the six months ended June 30, 2025 decreased $4.3 million, or 2%, compared to $255.2 million for the six months ended June 30, 2024. The decrease reflected lower interest income and higher interest expense on borrowings that was partially offset by lower interest expense on deposits.
The interest rate spread of 2.36% for the six months ended June 30, 2025, decreased 16 basis points compared to 2.52% for the six months ended June 30, 2024. Our net interest margin decreased 21 basis points, to 2.86% for the six months ended June 30, 2025 from 3.07% for the six months ended June 30, 2024. 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 $622.7 million, or 18%, and warehouse repurchase agreements grew by $473.8 million, or 35%, while other higher-margin loans receivable balances contracted by a net of $964.1 million.
Interest Income. Interest income of $591.6 million for the six months ended June 30, 2025 decreased $50.8 million, or 8%, compared to $642.4 million for the six months ended June 30, 2024. This decrease was primarily attributable to lower average yields on higher average balances on loans and loans held for sale, partially offset by higher average balances at lower average yields on securities held to maturity.
Interest income of $494.9 million on loans and loans held for sale for the six months ended June 30, 2025, decreased $61.5 million , or 11%, compared to $556.4 million for the six months ended June 30, 2024. The average loan balance during the six months ended June 30, 2025 increased $370.6 million, or 3%, to $14.3 billion compared to $13.9 billion for the six months ended June 30, 2024, and the average yield on loans decreased 106 basis points, to 6.98% for the six months ended June 30, 2025, compared to 8.04% for the six months ended June 30, 2024.
Interest income of $24.5 million on securities available for sale for the six months ended June 30, 2025, decreased $4.7 million, or 16%, compared to $29.2 million for the six months ended June 30, 2024. The average balance of securities available for sale decreased $104.1 million, or 10%, to $1.0 billion compared to $1.1 billion for the six
72
months ended June 30, 2025, and the average yield decreased 37 basis points, to 5.15% for the for the six months ended June 30, 2025, compared to 5.52% for the six months ended June 30, 2024.
Interest income of $47.5 million on securities held to maturity for the six months ended June 30, 2025, increased $7.2 million, or 18%, compared to $40.3 million for the six months ended June 30, 2024. The average balance of securities held to maturity for the six months ended June 30, 2025 increased $429.3 million, or 36%, to $1.6 billion compared to $1.2 billion for the six months ended June 30, 2024. The average yield on securities held to maturity decreased 92 basis points, to 5.96%, for the six months ended June 30, 2025, reflecting lower variable rates, compared to 6.88% for the six months ended June 30, 2024.
Interest income of $15.7 million on interest-bearing deposits, and other for the six months ended June 30, 2025, increased $3.9 million, or 33%, compared to $11.8 million for the six months ended June 30, 2024. The average balance of interest-earning deposits and other increased $133.0 million, or 34%, to $525.3 million for the six months ended June 30, 2025, from $392.3 million for the six months ended June 30, 2024, and the average yield decreased 2 basis points, to 6.01%, for the six months ended June 30, 2025, compared to 6.03% for the six months ended June 30, 2024.
Interest Expense. Total interest expense of $340.7 million for the six months ended June 30, 2025 decreased $46.6 million, or 12%, compared to $387.3 million for the six months ended June 30, 2024. The lower interest expense reflects a shift towards borrowings that has become a more cost-effective option than utilizing brokered certificates of deposit, in addition to growth in lower-cost, interest-bearing checking accounts.
Interest expense on deposits of $255.3 million for the six months ended June 30, 2025 decreased $95.4 million, or 27%, compared to $350.7 million for the six months ended June 30, 2024. The decrease was primarily due to lower average balances and lower average rates for certificate of deposit accounts and higher average balances at lower average rates on interest-bearing checking accounts.
Interest expense of $74.2 million on certificates of deposit for the six months ended June 30, 2025, decreased $90.6 million, or 55%, compared to $164.8 million for the six months ended June 30, 2024. The average balance of certificate of deposit accounts was $3.2 billion for the six months ended June 30, 2025, a decrease of $2.9 billion, compared to $6.1 billion for the six months ended June 30, 2024. The average rate on certificate of deposit accounts was 4.63% for the six months ended June 30, 2025, which was a 79 basis point decrease compared to 5.42% for the six months ended June 30, 2024.
Interest expense of $111.5 million on interest-bearing checking accounts for the six months ended June 30, 2025, decreased $7.4 million, or 6%, compared to the six months ended June 30, 2024. The average balance of interest-bearing checking accounts of $5.6 billion for the six months ended June 30, 2025 increased $641.7 million, or 13%, compared to $5.0 billion for the six months ended June 30, 2024. The average rate on interest-bearing checking accounts was 3.98% for the six months ended June 30, 2025, which was an 80 basis point decrease compared to 4.78% for the six months ended June 30, 2024.
Interest expense of $69.6 million on money market accounts for the six months ended June 30, 2025, increased $2.8 million, or 4%, compared to the six months ended June 30, 2024. The average balance of money market accounts of $3.4 billion for the six months ended June 30, 2025 increased $573.7 million compared to $2.8 billion for the six months ended June 30, 2024. The average rate on money market accounts was 4.16% for the six months ended June 30, 2025, which was a 64 basis point decrease compared to 4.80% for the six months ended June 30, 2024.
Interest expense of $85.4 million on borrowings for the six months ended June 30, 2025, increased $48.8 million, or 133%, compared to $36.6 million for the six months ended June 30, 2024. The increase was primarily due to a $2.4 billion, or 277%, increase in average balances, partially offset by a decrease of 319 basis points in the average rate of borrowings, to 5.23% compared to 8.42% for the six months ended June 30, 2024.
Included in interest expense on borrowings, our warehouse structured financing agreements provide for an additional interest payment for a portion of the earning generated. As a result, the cost of borrowings increased from a base rate of 5.00% and 7.93%, to an effective rate of 5.23% and 8.42% for the six months ended June 30, 2025 and 2024, respectively.
Provision for Credit Losses. We recorded a provision for credit losses of $60.8 million for the six months ended June 30, 2025, an increase of $46.1 million, or 314%, compared to $14.7 million for the six months ended June 30, 2024. The increases in provision expenses and charge-offs compared to both periods were primarily associated with estimated 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. The subordinated 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 $60.8 million provision for credit losses consisted of $64.0 million for the ACL-Loans, net of a release of $2.8 million for the ACL-OBCE’s and $0.4 million for the release of reserves on the ACL-Guarantees, related to a loan securitization.
$ 34,961
$ 20,524
$ 14,437
70%
(20,081)
(66)%
1,046
42%
Loss on sale of investments available for sale
(100)%
4,560
53%
1,878
18%
$ 74,173
$ 72,225
$ 1,948
Noninterest income of $74.2 million for the six months ended June 30, 2025 increased $1.9 million, or 3%, compared to the six months ended June 30, 2024. The increase was primarily due to a $14.4 million, or 70%, increase in gain on sale of loans, a $4.6 million, or 53%, increase in syndication and asset management fees, and a $1.9 million, or 18%, increase in other noninterest income, partially offset by a decrease of $20.1 million, or 66% in loan servicing fees compared to the six months ended June 30, 2024.
The $14.4 million, or 70%, increase in gain on sale of loans resulted from higher volume in the multi-family loan portfolio.
A summary of the gain on sale of loans for the six months ended June 30, 2025 and 2024 is below:
29,940
17,506
12,434
71%
2,634
804
1,830
228%
Small Business Association (SBA)
2,387
2,214
173
8%
14,437
Syndication and asset management fees of $13.1 million for the six months ended June 30, 2025, increased $4.6 million, or 53%, compared to $8.5 million for the six months ended June 30, 2024. The increase was attributable to an increase in the amount of projects and funds managed in combination with new equity raises by our LIHTC syndication platform during the six months ended June 30, 2025 than the prior year.
Other noninterest income of $12.4 million for the six months ended June 30, 2025 increased $1.9 million, or 18%, compared to $10.5 million for the six months ended June 30, 2024. Other noninterest income included a $2.1 million positive fair value adjustment to the floor derivatives for the six months ended June 30, 2025 compared to a $2.5 million positive fair value adjustment for the six months ended June 30, 2024. The floor derivatives are associated with arrangements whereby there is a guaranteed minimum interest rate the Company will receive on certain assets bearing variable interest rates. The change in value was driven largely by the change in market interest rates during the period. Also included in other noninterest income were changes in fair value on certain securities available for sale that the Company elected to account for under the fair value option, with changes in fair value reflected in earnings. The Company also has put options associated with these securities that provide protection against any change in value. By design, the fair value adjustments of the securities and the put options should be substantially equal and offsetting. For the six months ended June 30, 2025 there was a $1.3 million negative fair value adjustment on the securities that were offset by a $1.3 million positive fair value adjustment on the put options, hence having no net gain or loss recognized. Also see Note 2: Investment Securities, Note 11: Derivative Financial Instruments, and Note 12: Disclosures about Fair Value of Assets and Liabilities.
Loan servicing fees included a $0.5 million negative fair market value adjustment to servicing rights for the six months ended June 30, 2025, compared to a $19.0 million positive fair market value adjustment to servicing rights for the six months ended June 30, 2024.
$ 79,985
$ 57,969
$ 22,016
38%
(9)
369
(1,602)
(21)%
3,676
1,107
30%
6,335
276%
7,817
74%
$ 139,001
$ 99,292
$ 39,709
40%
Noninterest expense of $139.0 million for the six months ended June 30, 2025 increased $39.7 million, or 40%, compared to $99.3 million for the six months ended June 30, 2024. The increase was due primarily to a due to a $22.0 million, or 38%, increase in salaries and employee benefits to support business growth, including $8.3 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 as well. A significant contributor to the increased expenses during the period was a $7.8 million rise in other expenses, primarily related to taxes, insurance, receiver expenses, and legal fees tied to preserving collateral for nonperforming loans. Additionally, noninterest expenses rose due to a $6.3 million increase in credit risk transfer premium expenses, stemming from credit default swaps executed in March and December 2024, and a swap upsize in June 2025. Deposit insurance expenses also grew by $3.7 million, or 34%, driven by a rise in underperforming assets and overall asset growth.
The efficiency ratio was at 42.76% for the six months ended June 30, 2025, compared with 30.33% for the six months ended June 30, 2024. The $23.2 million in total expenses associated with credit default swap premiums, the collateral preservation of nonperforming loans, and the addition of production staff had a negative 714 basis point impact on the efficiency ratio for the six months ended June 30, 2025.
Income Taxes. Income tax expense of $29.1 million for the six months ended June 30, 2025 decreased $20.9 million, or 42%, compared to $50.0 million for the six months ended June 30, 2024. The decrease reflected a 41% lower pre-tax income during the six months ended June 30, 2025. The effective tax rate was 23.2% for the six months ended June 30, 2025 and 23.4% for the six months ended June 30, 2024.
Our Segments
We operate in three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. The reportable segments are consistent with the internal reporting and evaluation of the principal lines of business of the Company.
The Multi-family Mortgage Banking segment originates and services government sponsored mortgages for multi-family and healthcare facilities through Merchants Capital. Merchants Capital is also a fully integrated syndicator of low-income housing tax credit and debt funds. As one of the top ranked agency affordable lenders in the nation, our licenses with Fannie Mae, Freddie Mac, and FHA, coupled with our bank financing products, provide sponsors with custom beginning-to-end financing solutions that adapt to an ever-changing market. We are also one of the largest Ginnie Mae servicers in the country based on aggregate loan principal value. As of June 30, 2025 the Company’s total servicing portfolio had an unpaid principal balance of $31.0 billion, primarily managed in the Multi-family Mortgage Banking segment. Included in this amount was an unpaid principal balance of loans serviced for others of $18.7 billion, an unpaid principal balance of loans sub-serviced for others of $4.2 billion, and other servicing balances of $0.7 billion at June 30, 2025. These loans are not included in the accompanying balance sheets. The Company also manages $7.4 billion of loans for customers that have loans on the balance sheet at June 30, 2025. The servicing portfolio primarily consists of Ginnie Mae, Fannie Mae, and Freddie Mac loans and is a significant source of our noninterest income and deposits.
Our Mortgage Warehousing segment funds agency eligible loans for non-depository financial institutions from the date of origination or purchase until the date of sale to an investor, which typically takes less than 30 days and is a significant source of our net interest income, loans, and deposits. Mortgage Warehousing has grown to fund over $33.0 billion in 2023, $45.6 billion in 2024, and $28.1 billion for the six months ended June 30, 2025. Mortgage Warehousing also provides commercial loans and collects deposits related to the mortgage escrow accounts of its customers.
The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Banking operates primarily in Indiana, except for correspondent mortgage banking which, like Multi-family Mortgage Banking and Mortgage Warehousing, is a national
business. The Banking segment has a well-diversified customer and borrower base and has experienced significant growth over the past three years.
Our segment financial information was compiled utilizing the policies described in Note 17: Segment Information, included elsewhere in this report. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes, if any, in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. Transactions between segments consist primarily of borrowed funds and overhead expense sharing. Intersegment interest expense is allocated to the Mortgage Warehousing and Banking segments based on Merchants Bank’s cost of funds. The provision for credit losses is allocated based on information included in our ACL-Loans analysis and specific loan data for each segment.
Our segments diversify the net income of Merchants Bank and provide synergies across the segments. Strategic opportunities come from MCC and MCS, where loans are funded by the Banking segment and the Banking segment provides Ginnie Mae custodial services to MCC and MCS. Low-income tax credit syndication and debt fund offerings complement the lending activities of new and existing multi-family mortgage customers. The securities available for sale and held to maturity funded by MCC custodial deposits or purchases of securitized loans originated by MCC are pledged to FHLB to provide advance capacity during periods of high residential loan volume for Mortgage Warehousing. Mortgage Warehousing provides leads to Correspondent Lending in the Banking segment. Retail and commercial customers provide cross selling opportunities within the Banking segment. Merchants Mortgage is a risk mitigant to Mortgage Warehousing because it provides us with a ready platform to sell the underlying collateral to secure repayment. These and other synergies form a part of our strategic plan.
The Other segment presented below, in Note 17: Segment Information, and elsewhere in this report includes general and administrative expenses for provision of services to all segments, internal funds transfer pricing offsets resulting from allocations to or from the other segments, certain elimination entries, and investments in low-income housing tax credit limited partnerships or LLC.
For the three months ended June 30, 2025 and 2024, we had total net income of $38.0 million and $76.4 million, respectively. For the six months ended June 30, 2025 and 2024, we had total net income of $96.2 million and $163.4 million, respectively. Net income for our three segments for the respective periods was as follows:
Multi-family Mortgage Banking
Mortgage Warehousing
Multi-family Mortgage Banking.
Comparison of results for the three months ended June 30, 2025 and 2024:
The Multi-family Mortgage Banking segment reported net income of $9.3 million for the three months ended June 30, 2025, an increase of $0.2 million, or 3%, compared to the three months ended June 30, 2024. The increase in net income was primarily due to a $9.0 million increase in gain on sale of loans, $6.5 million increase in syndication and asset management fees, partially offset by an increase of $12.9 million in noninterest expense that included $5.8 million
77
associated with the addition of production staff, who are expected to elevate production, gain on sale, and expenses in future quarters as well.
Loan servicing fees included a $0.7 million positive fair market value adjustment to servicing rights for the three months ended June 30, 2025 compared to a $4.5 million positive fair market value adjustment for the three months ended June 30, 2024.
The total volume of loans originated and acquired through our Multi-family business increased by $352.8 million, or 33%, to $1.4 billion, for the three months ended June 30, 2025, compared to $1.1 billion for the three months ended June 30, 2024. It includes construction loans coupled with agreements for future permanent loan refinancing, as well as bridge loans housed in our Banking segment, while borrowers await conversion to permanent financing. It also includes loans originated and acquired for sale in the secondary market.
Comparison of results for the six months ended June 30, 2025 and 2024:
The Multi-family Mortgage Banking segment reported net income of $12.7 million for the six months ended June 30, 2025, a decrease of $13.0 million or 51%, from the $25.6 million of net income reported for the six months ended June 30, 2024. The decrease in net income was primarily due to a $17.9 million increase in noninterest expense that included $8.3 million associated with the addition of production staff, who are expected to elevate production, gain on sale, and expenses in future quarters as well, as well a $15.3 million decrease in loan servicing fees. These increases were partially offset by increases of $9.6 million in gain on sale of loans and $5.5 million in syndication and asset management fees.
Loan servicing fees for the six months ended June 30, 2025 included a positive fair market value adjustment of $1.2 million on servicing rights, compared to a positive fair market value adjustment of $17.7 million for the six months ended June 30, 2024.
The volume of loans originated and acquired through our Multi-family business increased by $390.5 million, or 20%, to $2.4 billion, for the six months ended June 30, 2025, compared to $2.0 billion for the six months ended June 30, 2024. It includes construction loans coupled with agreements for future permanent loan refinancing, as well as bridge loans housed in our Banking segment, while borrowers await conversion to permanent financing. It also includes loans originated and acquired for sale in the secondary market.
Mortgage Warehousing.
The Mortgage Warehousing segment reported net income of $23.0 million for the three months ended June 30, 2025, an increase of $0.7 million, or 3%, compared to $22.3 million for the three months ended June 30, 2024. The increase in net income reflected an increase in other noninterest income partially offset by an increase in noninterest expense related to premiums for credit risk transfers, and an increase in provision for credit losses.
Noninterest income included a $4.3 million positive fair market value adjustment to derivatives for the three months ended June 30, 2025, compared to a $0.2 million positive fair market value adjustment to derivatives for the three months ended June 30, 2024.
The volume of loans funded during the three months ended June 30, 2025 amounted to $16.3 billion, an increase of $5.4 billion, or 49%, compared to the three months ended June 30, 2024. This compared to the 28% industry increase in single-family residential loan volumes for the three months ended June 30, 2025 compared to the same period in 2024, according to an estimate of industry volume by the Mortgage Bankers Association.
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The Mortgage Warehousing segment reported net income for the six months ended June 30, 2025 of $38.4 million, a decrease of $4.1 million, or 10%, compared to $42.5 million for the six months ended June 30, 2024. The decrease in net income primarily reflects an increase in noninterest expense reflecting premiums related to credit risk transfers.
Noninterest income included a $2.1 million positive fair market value adjustment to derivatives for the six months ended June 30, 2025, compared to a $2.5 million positive fair market value adjustment to derivatives for the six months ended June 30, 2024.
The volume of loans funded during the six months ended June 30, 2025 amounted to $28.1 billion, an increase of $9.3 billion, or 49%, compared to the six months ended June 30, 2024. This compared to the 16% industry increase in single-family residential loan volumes for the six months ended June 30, 2025 compared to the same period in 2024, according to an estimate of industry volume by the Mortgage Bankers Association.
Banking.
The Banking segment reported net income of $14.6 million for the three months ended June 30, 2025, a decrease of $37.8 million, or 72%, compared to $52.4 million for the three months ended June 30, 2024. The decrease in net income was primarily due to the increase in provision for credit losses, partially offset by an increase in gain on sale of loans.
Noninterest income for the three months ended June 30, 2025 included a $0.5 million negative fair market value adjustment on servicing rights, compared to a $0.6 million positive fair market value adjustment for the three months ended June 30, 2024.
The Banking segment reported net income of $61.7 million for the six months ended June 30, 2025, a decrease of $47.1 million, or 43%, compared to $108.8 million for the six months ended June 30, 2024. The decrease in net income was primarily due to the increase in provision for credit losses.
Noninterest income for the six months ended June 30, 2025 included a negative fair market value adjustment of $1.7 million on servicing rights, compared to a positive fair market value adjustment of $1.3 million for the six months ended June 30, 2024.
The Bank has established a limit with respect to its commercial real estate loans whereby it will not increase its commercial real estate portfolio at any time during a calendar year by more than 10% from the balance at its prior calendar year-end.
Liquidity and Capital Resources
Liquidity.
Our primary sources of funds are business and consumer deposits, escrow and custodial deposits, borrowings, brokered deposits, principal and interest payments on loans, interest on investment securities, and proceeds from sale of loans. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition.
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At June 30, 2025, based on collateral, we had $5.0 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. This compared to $4.3 billion at December 31, 2024. While the amounts available fluctuate daily, we also had available capacity lines through our membership in the AFX. This liquidity enhances the Company’s ability to effectively manage interest expense and asset levels in the future.
The Company’s most liquid assets are in cash, short-term investments, including interest-bearing 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 $5.0 billion described above, these totaled $11.9 billion, or 62%, of its $19.1 billion total assets at June 30, 2025. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our liquid assets and borrowing capacity significantly exceed our uninsured deposits. Uninsured deposits represent 24% of total Bank deposits. Our line of credit with the Federal Reserve Bank of Chicago, alone, could fund 106% of uninsured deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.4 billion and $1.6 billion as of June 30, 2025 and December 31, 2024, respectively.
The Company’s investment portfolio has minimal levels of unrealized losses and management does not anticipate a need to sell securities for liquidity purposes at a loss. As of June 30, 2025, AOCL of $0.2 million, related to securities available for sale increased $0.1 million, or 86%, compared to AOCL of $0.1 million as of December 31, 2024. The $0.2 million of AOCL as of June 30, 2025 represented less than 1% of total equity and 1% of total securities available for sale
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $26.9 million and $(332.7) million for the six months ended June 30, 2025 and 2024, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities and loans, was $ (27.2) million and $(1.0) billion for the six months ended June 30, 2025 and 2024, respectively. Net cash provided by financing activities, which is comprised primarily of net change in borrowings and deposits was $170.9 million and $1.3 billion for the six months ended June 30, 2025 and 2024, respectively. Most variability within our cash flow comes from loan growth and sale activity. As discussed in detail throughout this section and Capital Resources, the Company has numerous funding sources to cover volatility in cash flow for operating and financing needs through our cash, investments, borrowing capacity, deposit base and capital resources.
Certificates of deposit that are scheduled to mature in less than one year from June 30, 2025 totaled $2.3 billion, or 98%, of total certificates of deposit. Of the $2.3 billion in total, there were $1.3 billion classified as core deposits. Management expects that a substantial portion of the maturing core certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may decide to utilize FHLB advances, the Federal Reserve discount window, brokered deposits, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Off-Balance Sheet Arrangements.
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our unaudited condensed consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit.
At June 30, 2025, we had $3.9 billion in outstanding commitments to extend credit that are subject to credit risk and $3.6 billion outstanding commitments subject to certain performance criteria and cancellation by the Company, including loans pending closing, unfunded construction draws, and unfunded lines of warehouse credit. We anticipate
that we will have sufficient funds available to meet our current loan origination commitments. Additionally, the Company’s business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.
Capital Resources.
The access to and cost of funding new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position. The Company filed a shelf registration statement on Form S-3 with the SEC on May 23, 2025, which was declared effective on June 4, 2025, under which we can issue up to $500 million aggregate offering amount of registered securities to finance our growth objectives. The Company has demonstrated its ability to raise capital or utilize securitization transactions to free up capital as needed.
The assessment of capital adequacy depends on a number of factors, including asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to our current operations and to promote public confidence in our Company.
Shareholders’ Equity. Total shareholders’ equity was $2.2 billion as of June 30, 2025. The $58.7 million or 3%, decrease compared to December 31, 2024 resulted primarily from the redemption of 6% Series B Preferred Stock for $125.0 million and dividends paid on common and preferred shares of $29.7 million during the period, which were partially offset by net income of $96.2 million. See Note 14: Preferred Stock for more details on the Series B redemption.
Preferred Stock/Dividends.
7% Series A Preferred Stock. The Company redeemed all outstanding shares of the Series A Preferred Stock on April 1, 2024 for $52 million at a price equal to the liquidation preference of $25.00 per share, using cash on hand.
6% Series B Preferred Stock. The Company redeemed all outstanding shares of the Series B Preferred Stock on January 2, 2025, at a price equal to the liquidation preference of $1,000 per share (equivalent to $25 per depositary share), or $125.0 million. The $4.2 million expenses associated with the original issuance, which were capitalized in 2019, were recognized through retained earnings upon redemption, thus reducing net income available to common shareholders. Similarly, the redemption resulted in an excise tax of $1.2 million that will not be payable until 2025 taxes are due in 2026, and any future issuance of shares until one year after the redemption can offset the amount of excise tax that will be paid.
Cash to redeem the shares was delivered to the Company’s transfer agent on December 31, 2024, resulting in a prepaid asset reported in other assets. As of the redemption date, the Series B Preferred Stock did not have any accrued, but unpaid dividends.
7.625% Series E Preferred Stock. On November 25, 2024, the Company issued 9,200,000 depositary shares, each representing a 1/40th interest in a share of its 7.625% Fixed Rate Reset Series E Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $230.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $7.3 million paid to third parties, the Company received total net proceeds of $222.7 million.
The Series E Preferred Stock have no voting rights with respect to matters that generally require the approval of our common shareholders. Dividends on the Series E Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series E Preferred Stock, in whole or in part, at its option, on any dividend payment date on or after January 1, 2030, subject to the approval of the appropriate federal banking agency, at
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the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
Dividends declared to preferred shareholders for the six months ended June 30, 2025, totaled $10.3 million. For more information, see Note 14: Preferred Stock.
Common Shares/Dividends. As of June 30, 2025, the Company had 45,885,458 common shares issued and outstanding. The Board declared a quarterly dividend of $0.10 per share for the first two quarters of 2025.
Capital Adequacy.
The following tables present the Company’s capital ratios at June 30, 2025 and December 31, 2024:
Quantitative measures established by regulation to ensure capital adequacy require the Company and Merchants Bank to maintain minimum amounts and ratios (set forth in the table above). Management believes, as of June 30, 2025 and December 31, 2024, that the Company and Merchants Bank met all capital adequacy requirements to which they were subject. For additional information regarding dividend restrictions, see the Company’s 2024 Annual Report on Form 10–K.
As of June 30, 2025 and December 31, 2024, the most recent notifications from the Federal Reserve categorized the Company as well capitalized and most recent notifications from the FDIC categorized Merchants Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s or Merchants Bank’s category and as of June 30, 2025, the Bank’s capital exceeded the levels agreed to in the MOU.
Additionally, the Bank has established a minimum leverage ratio of 9.0% and a minimum total capital ratio of 12.5%.
The Company’s principal source of funds for dividend payments to shareholders is dividends received from the Bank. Banking statutes and regulations limit the maximum amount of dividends that a bank may pay without requesting prior approval of regulatory agencies. Under Indiana law, the Bank may not pay a dividend if such dividend would be greater than retained net income (as defined) for the current year plus those for the previous two years. Additionally,
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under the MOU, if the Bank’s capital ratios fall below the minimums described above, the Bank may not pay dividends without the FDIC and DFI’s prior consent.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk related to market demand.
Interest Rate Risk
Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries or SOFR.
Our business consists of funding low risk, multi-family, residential, SBA loans, and warehouse repurchase agreements, meeting underwriting standards of government programs under an originate to sell model, and retaining adjustable-rate loans as held for investment to reduce interest rate risk.
Our Asset-Liability Committee, or ALCO, is a management committee that manages our interest rate risk within policy limits established by our board of directors. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO meets quarterly, at a minimum, to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits. Additionally, the Risk Committee of our Board meets quarterly, in conjunction with Board meetings, to assess risks associated with interest rate sensitivity.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
We use two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets,
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liabilities, and derivatives and excludes non-interest income. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.
We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results reflect the analysis used quarterly by management. It models gradual -200, -100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period.
The following table presents NII at Risk for Merchants Bank as of June 30, 2025 and December 31, 2024.
Net Interest Income Sensitivity
Twelve Months Forward
- 200
- 100
+ 100
+ 200
June 30, 2025:
Dollar change
(84,289)
(44,357)
42,895
85,982
Percent change
(15.9)
(8.3)
8.1
16.2
December 31, 2024:
(63,859)
(34,202)
34,088
68,263
(12.2)
(6.5)
Our interest rate risk management policy objective is to limit the change in our net interest income to 20% for a +/- 100 basis point move in interest rates, and 30% for a +/- 200 basis point move in rates. At June 30, 2025 we estimated that we were within policy limits set by our board of directors for the -200, -100, +100, and +200 basis point scenarios.
The EVE results for Merchants Bank included in the following table reflect the analysis used quarterly by management. It models immediate -200, -100, +100 and +200 basis point parallel shifts in market interest rates.
Economic Value of Equity
Sensitivity (Shock)
Immediate Change in Rates
54,849
36,112
2,604
4,897
2.6
1.7
0.1
0.2
12,188
14,762
(1,118)
(2,990)
0.6
0.7
(0.1)
Our interest rate risk management policy objective is to limit the change in our EVE to 15% for a +/- 100 basis point move in interest rates, and 20% for a +/- 200 basis point move in rates. We are within policy limits set by our board of directors for the -200, -100, +100 and +200 basis point scenarios. The EVE reported at June 30, 2025 projects that as interest rates increase (decrease) immediately, the economic value of equity position will be expected to decrease (increase). When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.
Non-GAAP Financial Measures
The Company’s accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist users of the financial information in assessing the Company’s operating performance. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the following table.
Although intended to enhance understanding of the Company’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance.
Total equity
$ 2,184,632
$ 1,888,147
Less: goodwill and intangibles
(8,062)
(8,108)
Less: preferred stock
(551,291)
(449,387)
Tangible common shareholders' equity
$ 1,625,279
$ 1,430,652
$ 19,141,204
$ 18,212,422
Tangible assets
$ 19,133,142
$ 18,204,314
Ending common shares
Tangible book value per common share
$ 35.42
$ 31.27
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q under the headings “Liquidity and Capital Resources” and “Interest Rate Risk.”
ITEM 4 Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2025, the Company’s disclosure controls and procedures were effective.
(b) Changes in internal control.
There have been no changes in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II
Other Information
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
ITEM 6. Exhibits
Exhibit
Number
Description
3.1
Second Amended and Restated Articles of Incorporation of Merchants Bancorp. (incorporated by reference to Exhibit 3.1 of Form 8-K, filed on May 24, 2022).
3.2
Articles of Amendment to the Second Amended and Restated Articles of Incorporation dated September 27, 2022 designating the 8.25% Fixed Rate Reset Series D Non-Cumulative Perpetual Preferred Stock (incorporated by reference to Exhibit 3.2 of Form 8-A filed on September 27, 2022).
3.3
Articles of Amendment to the Second Amended and Restated Articles of Incorporation dated November 25, 2024 designating the 7.625% Fixed Rate Series E Non-Cumulative Perpetual Preferred Stock (incorporated by reference to Exhibit 3.2 of Form 8-A filed on November 25, 2024).
3.4
Second Amended and Restated By-Laws of Merchants Bancorp (incorporated by reference to Exhibit 3.1 of Form 8-K, filed on November 20, 2017).
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
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Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
August 11, 2025
By:
/s/ Michael F. Petrie
Michael F. Petrie
Chairman & Chief Executive Officer
/s/ Sean A. Sievers
Sean A. Sievers
Chief Financial Officer
(Principal Financial Officer)