Merchants Bancorp's Preferred Shift: Capturing Yield & Strengthening Capital

The financial landscape for regional banks has grown increasingly complex, yet Merchants Bancorp (NASDAQ: MBIN) has emerged as a strategic standout through its recent capital restructuring. By redeeming its high-cost Series B preferred stock and issuing the lower-rate Series E preferred stock (NASDAQ: MBINL), the bank has positioned itself to capitalize on yield advantages while fortifying its balance sheet. For income-oriented investors, MBINL offers a compelling entry point: a 7.625% dividend yield at a discount to liquidation value, paired with the potential for capital appreciation as the stock converges toward its $25 par.

The Redemption of the Costly Series B: A Necessary Move

Merchants Bancorp's decision to redeem its Series B preferred stock (MBINO) on January 2, 2025, was a prudent step to reduce interest expenses. The Series B carried a steep 9.42% dividend rate post-October 2024, a result of its floating-rate structure tied to three-month LIBOR. With the bank's net interest margin pressured by rising rates, this high-cost debt became a drag on profitability. By replacing it with the Series E stock, which sports a fixed 7.625% rate, Merchants slashed its annualized interest burden by over 17%—a critical move to preserve capital efficiency.

The Series E Preferred: A High-Yield, Secure Income Play

The Series E offering, priced at $25 per depositary share, now trades at a 6.68% discount to its liquidation value ($23.33 as of June 2025). This discount creates a margin of safety for investors, as the bank is contractually obligated to repay the full $25 per share upon redemption or liquidation. The stock's 7.625% dividend translates to an 8.17% yield at current prices, making it highly attractive for income seekers.

Crucially, the Series E's non-cumulative feature—though often perceived as a risk—is mitigated by Merchants' strong financial footing. With $18.8 billion in assets and a $12.4 billion deposit base (as of March 2025), the bank boasts ample liquidity and a stable funding base. This stability reduces the likelihood of dividend cuts, even in a stressed environment.

Balance Sheet Strength: The Backstop for Investors

The Series E issuance raised $230 million, enabling Merchants to retire the Series B debt entirely. This refinancing not only reduces interest costs but also improves regulatory capital ratios, as preferred stock generally carries favorable treatment under banking regulations. The bank's Common Equity Tier 1 (CET1) ratio likely strengthened post-redemption, enhancing its resilience against economic downturns.

Moreover, the proceeds from Series E are being deployed into balance sheet growth—a smart move given the bank's 12% year-over-year deposit growth in Q1 2025. This expansion underscores management's confidence in scaling operations while maintaining profitability.

Why MBINL Outperforms: Yield + Upside

Investors in MBINL benefit from two distinct advantages:
1. Income: The 8.17% yield at current prices exceeds the 5.8% average for regional bank preferreds, offering superior cash flow.
2. Capital Appreciation: As the stock nears its $25 liquidation value, price appreciation becomes increasingly probable. Even a partial retracement to $24 would yield a 6% gain, while a full return to par would deliver a 7.5% uplift.

Risks and Considerations

While the case for MBINL is strong, investors should note:
- Interest Rate Sensitivity: Preferred stocks typically decline in value as rates rise. However, the Series E's fixed rate and discount to par partially insulate it from this risk.
- Dividend Dependency: Non-cumulative preferreds can see dividends suspended if earnings falter. Merchants' consistent profitability, however, reduces this likelihood.

Final Call: A High-Yield Opportunity with Upside

Merchants Bancorp's strategic shift to Series E preferred stock marks a disciplined approach to capital management. By eliminating high-cost debt and issuing a competitively priced alternative, the bank has created a win-win: reduced expenses for itself and a high-yield, discounted security for investors.

At its current price, MBINL offers a rare combination of income security (8.17% yield) and capital upside (potential 7.5% gain to par). For portfolios seeking to weather rising rates, this non-cyclical, bank-backed preferred stock is a compelling addition.

Recommendation: Accumulate MBINL on dips below $23.50. Investors should pair this with a long-term horizon, as the bank's balance sheet growth and dividend sustainability will drive value over time.

Analysis as of June 6, 2025.