Financial Data and Key Metrics Changes - The economic book value decreased by 1% to $13.69 per share, while GAAP book value also fell by 1% to $13.12 per share [14] - Distributable earnings (DE) for the quarter were $0.24 per share, down from $0.29 per share in the previous quarter, primarily due to credit losses [17] - GAAP earnings were $33.2 million or $0.22 per basic common share, driven by an increase in net interest income to $61.3 million [14][15] Business Line Data and Key Metrics Changes - The company sourced $876 million in loans and securities, including $500 million in non-QM loans and $217 million in business purpose loans [12][20] - The delinquency rate for loans over 60 days decreased from 7.5% to 7.3% [15][24] - Lima One originated $217 million in business purpose loans, with an increase in mortgage banking income from $5.4 million to $6.1 million [23] Market Data and Key Metrics Changes - The market for securitized mortgage credit assets continues to deepen, with increased liquidity and strong investor appetite [6][9] - Mortgage credit spreads widened in April but retraced to levels seen at the end of Q1 by the end of the second quarter [6][22] - The company completed its eighteenth non-QM securitization in May, selling $291 million of bonds at an average coupon of 5.76% [21] Company Strategy and Development Direction - The company aims to continue focusing on non-QM loans, business purpose loans, and agency securities, with plans to grow the business purpose loan originations [20][23] - The management is optimistic about the economic return potential of the portfolio, indicating that the economic earnings power is closer to a 10% dividend yield [29] - The company is actively resolving non-performing loans and expects to utilize additional loan sales to accelerate the resolution of underperforming assets [16] Management's Comments on Operating Environment and Future Outlook - The management noted that the economic and macro environments appear clearer as the year progresses, with resilient growth despite slower than expected rates [8][9] - There is a consensus for two rate cuts later this year, which is favorable for mortgage REITs [9] - The management expressed confidence in the current earnings power of the portfolio and the sustainability of the common dividend [18] Other Important Information - The company expects to lower its G&A expenses by 7% to 10% per year from 2024 levels due to ongoing expense reduction initiatives [18] - Subsequent to the quarter end, the economic book value is estimated to have increased by approximately 1% to 2% [19] Q&A Session Summary Question: Economic return for the portfolio - Management discussed the economic return of the portfolio and indicated that the economic earnings power is much closer to a 10% dividend yield, with potential upside as capital is redeployed from troubled loans [28][29] Question: New loan officers at Lima One - The new hires are focused on the West and Midwest, with expectations for aggressive growth in the latter half of the year as they ramp up [40][41] Question: Capital allocation trends - Management indicated that they would continue to deploy capital across non-QM, HC, and business purpose loans, with a preference for increasing business purpose loan originations [33][49] Question: Distribution potential for new transitional loans - Management noted that they have been selling rental loans and expect to grow originations, with a balance between securitization financing and loan sales [56] Question: Execution risk for developers - Management stated that they are not seeing material pressure on rental income and exit prices, tracking these metrics month to month [65][66] Question: Relative risk of loan vintages - Management indicated that the 2023 vintage for multifamily loans was tougher, but overall LTVs are low, minimizing concerns about losses [67] Question: Callability of non-QM portfolio - Management explained that lower interest rates could lead to more callable deals, but the impact would be marginal due to offsetting swaps [70][72]

Core Points - Merchants Bancorp reported a net income of $38.0 million for Q2 2025, a decrease of 50% compared to $76.4 million in Q2 2024 and a decrease of 35% from $58.2 million in Q1 2025 [1][12] - The decrease in net income was primarily due to a significant increase in the provision for credit losses, which rose by $43.1 million, or 432%, year-over-year and $45.3 million, or 586%, quarter-over-quarter [3][4][12] - Despite the challenges, the company noted a 17% reduction in total delinquencies and a 58% decline in loans classified as special mention during the quarter, indicating some improvement in asset quality [2][9] Financial Performance - The diluted earnings per common share for Q2 2025 were $0.60, down 60% from $1.49 in Q2 2024 and down 35% from $0.93 in Q1 2025 [1][12] - Total assets increased to $19.1 billion, up 2% from both March 31, 2025, and December 31, 2024, driven by higher balances in mortgage warehouse portfolios [5][12] - Noninterest income rose by $19.1 million, or 61%, compared to the previous year, primarily due to a robust gain on sale of loans [3][23] Asset Quality - The allowance for credit losses on loans increased to $91.8 million, reflecting a 10% increase from March 31, 2025, and a 9% increase from December 31, 2024 [7][12] - Charge-offs for the quarter totaled $46.1 million, primarily in the multi-family loan portfolio, compared to $3.5 million in Q2 2024 [8][12] - Loans classified as substandard increased to $417.7 million, while criticized loans overall declined by 19% compared to March 31, 2025 [9][10] Deposits and Liquidity - Total deposits reached $12.7 billion, an increase of 2% from March 31, 2025, and 6% from December 31, 2024, with core deposits representing 90% of total deposits [14][15] - Cash balances increased to $647.2 million, up 24% from March 31, 2025, and 36% from December 31, 2024, indicating strong liquidity [17][18] - The company had $5.0 billion in unused borrowing capacity, representing 26% of total assets, enhancing its liquidity position [12][17] Operating Results - Net interest income for Q2 2025 was $128.7 million, essentially unchanged from Q2 2024, while interest income decreased by 7% to $304.4 million [20][21] - Noninterest expense increased by 54% to $77.3 million, driven by higher salaries and employee benefits as well as other operational costs [24][30] - The net interest margin decreased to 2.83%, down 16 basis points from the previous year, impacted by a shift in business mix [25][34]

Financial Data and Key Metrics Changes - For Q1 2025, the company reported net income and adjusted net income of $26 million, with reported earnings per diluted share at $1.52 and $1.53 on an adjusted basis [5][19] - The adjusted net interest margin (NIM) on a tax-equivalent basis increased by one basis point compared to the previous quarter, while the core operating margin performance overcame four basis points of dilution from expired interest rate caps [5][21] - Non-interest income for the first quarter was $17 million, including $7 million generated from capital markets revenue [7][22] - The effective tax rate for the quarter was 1%, down from 9% in the prior quarter, primarily due to tax benefits from equity compensation and new state tax credit investments [33][34] Business Line Data and Key Metrics Changes - The wealth management business generated $5 million in revenue for Q1 2025, reflecting a 14% annualized increase from the prior quarter [8][23] - Total loans held for investment grew by $39 million or 2% annualized, with annualized loan growth at 4% when adjusting for the runoff of M2 equipment finance loans [26][27] - Non-interest expenses decreased by $7 million or 13% to $47 million, well below the guidance range of $52 million to $55 million [9][24] Market Data and Key Metrics Changes - Total core deposit growth was robust at 20% annualized, reflecting success in expanding market share with both new and existing clients [7][28] - The company experienced strong deposit betas, actively managing deposit costs as the Federal Reserve began reducing interest rates [21][96] Company Strategy and Development Direction - The company intends to continue utilizing securitizations to provide flexibility, enhance liquidity, and manage growth as it approaches $10 billion in assets [6][13] - The focus remains on the growth potential of the wealth management business, driven by strategic investments in Southwest Missouri and Central Iowa markets [8][24] - The company is committed to maintaining strong liquidity and building capital, with a focus on increasing regulatory capital ratios [14][32] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the long-term resiliency of markets and the financial health of clients, despite macroeconomic uncertainties [11][16] - The company is closely monitoring key industries within its loan portfolio and adapting to changing economic conditions [10][31] - Management indicated that loan growth guidance for Q2 2025 is projected at an annualized rate of 4% to 6%, reflecting current economic uncertainties [6][38] Other Important Information - The company reported a decrease in total criticized loan balances by 28 basis points from the prior quarter, marking the lowest criticized ratio in five years [9][29] - The tangible common equity to tangible assets ratio increased by 15 basis points to 9.7% at quarter end, driven by strong earnings [32] Q&A Session Summary Question: Loan growth outlook and uncertainties - Management acknowledged that first quarter loan growth was modest due to elevated payoffs from clients selling properties or businesses, and revised guidance reflects economic uncertainties [38] Question: Provision for credit losses - Management indicated that a lower provision for credit losses is likely if loan growth remains muted [41] Question: Margin and fixed-rate loans repricing - Management confirmed continued success in rolling up rates on new fundings, with a weighted average rate of 7.21% for the quarter [42] Question: Non-interest income expectations - Management expects non-interest income to grow at 6% or better, with strong performance in wealth management contributing significantly [50] Question: Capital markets revenue outlook - Management expressed confidence in improved capital markets performance in the coming quarters, driven by a return to normalcy in project activity [54] Question: Securitization plans - Management indicated that timing for the next securitization will depend on the pace of growth in the LITECH business, with plans for a larger securitization in the $350 million range [78][102] Question: Credit quality and tariff exposure - Management conducted a credit analysis of commercial borrowers and identified minimal high-risk exposure related to tariffs, with most clients having shifted imports away from China [90][92]