Why Merchants Bancorp’s Capital Restructuring Makes It a Top Income Play

As of May 13, 2025, Merchants Bancorp (NASDAQ: MBIN) stands at a pivotal juncture, having executed a series of strategic moves that position it as one of the most disciplined income-generating banks in a volatile interest-rate environment. With $18.8 billion in assets and a relentless focus on capital optimization, the company has combined preferred stock redemptions, dividend adjustments, and balance sheet fortification to create a compelling value proposition for investors seeking both stability and growth.

The Capital Efficiency Play: Redeeming High-Cost Debt, Issuing Lower-Cost Equity

At the heart of Merchants Bancorp’s strategy is its debt-for-equity swap to reduce interest costs and streamline its capital structure. In January 2025, the company redeemed its 9.42% Series B Preferred Stock—a high-cost liability that had become increasingly burdensome as rates stabilized. This move eliminated $120.8 million in obligations, even after accounting for $1.2 million in deferred taxes.

Simultaneously, Merchants issued Series E Preferred Stock at a 7.625% fixed rate, locking in lower-cost capital to fund growth. The $222.7 million raised via Series E (compared to $191.1 million in Series C and $137.5 million in Series D) reflects a deliberate shift toward cheaper, long-term funding. This net reduction in interest expense—combined with a 32% drop in brokered deposits (now $1.7 billion vs. $5.7 billion in 2024)—has slashed funding costs, freeing capital for higher-margin activities like mortgage warehousing and multi-family lending.

Dividend Discipline Signals Financial Confidence

While capital restructuring addresses costs, Merchants’ dividend policy underscores its confidence in sustained profitability. In Q1 2025, the company increased its common stock dividend by 5.7% to $0.10 per share, marking its first hike in two years. This move aligns with its 7% payout ratio (vs. net income of $58.2 million in Q1 2025), leaving ample room for further increases.

Meanwhile, preferred dividends remain stable, with Series C, D, and E paying fixed rates of 6%, 8.25%, and an unspecified rate, respectively. The consistency here matters: preferred holders receive predictable income, while common shareholders benefit from a company that retains earnings to fuel growth.

Balance Sheet Strength: A Fortress Amid Volatility

Merchants’ balance sheet is its most compelling asset. As of March 31, 2025:
- Total assets grew to $18.8 billion, up 3% from September 2024, driven by rising mortgage warehouse portfolios and securities.
- Core deposits surged to $10.7 billion (86% of total deposits), a 30% year-over-year increase, reducing reliance on volatile wholesale funding.
- Liquidity is robust: $4.7 billion in unused borrowing capacity (including $3.3 billion from the Federal Reserve) covers uninsured deposits 107%—a comfort in uncertain times.

Even amid rising non-performing loans (now 2.73% of total loans vs. 1.22% in 2024), Merchants’ $2.2 billion in credit protection arrangements and conservative underwriting mitigate risk. The efficiency ratio improved to 66.8% in Q1 2025, down from 74% in -year-ago, signaling operational refinement.

Strategic Timing: Capital Moves Align with Rate Cycle

Merchants’ actions are perfectly timed to the interest-rate environment. With the Fed pausing rate hikes and markets pricing in a potential cut by late 2025, the bank’s lower-cost capital structure insulates it from further volatility. The decline in brokered deposits (down 70% from 2024 levels) and rise in Federal Home Loan Bank borrowings reflect a proactive pivot to cheaper, longer-term liabilities.

The Investment Thesis: A Resilient Income Play with Upside

1. Dividend Upside: At $0.10/share annually, the current yield is 2.8%—well above the sector average of 2.1%—with room to grow as earnings recover.
2. Capital Efficiency: Reducing Series B’s 9.42% rate to Series E’s 7.625% saves ~$2 million annually pre-tax, boosting net income.
3. Asset Quality: While NPLs have risen, they remain concentrated in sectors (multi-family, healthcare) where Merchants has strong relationships and collateral coverage.
4. Growth Catalysts: A rebound in mortgage origination volumes and its $2.5 billion in CRE loans (growing 3% YoY) could reignite earnings.

Final Call: Buy MBIN for Income and Resilience

Merchants Bancorp is not just surviving—it’s repositioning for leadership in a post-pandemic banking landscape. Its disciplined capital management, fortress balance sheet, and dividend hikes make it a rare blend of income stability and growth potential. With a P/B ratio of 1.05 (vs. peers at 1.2) and a tangible book value growing at 3% annually, this is a buy below $25/share—targeting $28 by year-end 2025 as rate pressures ease.

Investors seeking a bank with a moat against volatility and a track record of shareholder-friendly decisions should act now. The pieces are in place for Merchants to outperform in both rising and falling rate environments—a rare trait in today’s market.

Disclaimer: Past performance does not guarantee future results. Investors should conduct their own due diligence.