Merchants Bancorp (MBIN) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and the Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the accompanying notes included elsewhere in this report.

Discussion and Analysis of the Company’s financial condition and the results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 is contained in Item 7 of Form 10-K for the year ended December 31, 2023 filed with the SEC on March 12, 2024.

This discussion and analysis contains forward-looking statements that are subject to known and unknown risks and uncertainties that could cause our results to differ materially from our expectations. Actual results and the timing of events may differ significantly from those expressed or implied by such forward-looking statements due to a number of factors, including those set forth under Item 1 - “ Special Note Regarding Forward Looking Statements,” Item 1A - “Risk Factors,” and elsewhere in this report. We assume no obligation to update any of these forward-looking statements.

Financial Highlights for the Year Ended December 31, 2024

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Company and Business Segment 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.

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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 higher than industry shareholder return.

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See “Company Overview and Our Business Segments,” in Item 1 “Business”, “Operating Segment Analysis for the Years Ended December 31, 2024 and 2023” in Item 7 “Management’s Discussion and Analysis of Financial Condition and the Results of Operations”, and “Segment Information,” in Note 23: Segment Information for further information about our segments.

Primary Factors We Use to Evaluate Our Business

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items on our consolidated balance sheets and statements of income, as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance, and the financial condition and performance of comparable financial institutions in our region.

Results of operations

In addition to net income, the primary factors we use to evaluate and manage our results of operations include net interest income, noninterest income, noninterest expense, and return on average equity.

Net interest income. Net interest income represents interest income less interest expense. We generate interest income from interest (net of deferred origination fees received and costs paid, which are amortized over the expected life of the loans) and fees received on interest-earning assets, including loans, investment securities, cash, and dividends on FHLB stock we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings. Net interest income is the most significant contributor to our revenues and net income. To evaluate net interest income, we measure and monitor: (a) yields on our loans and other interest-earning assets; (b) duration on our loans, deposits, and borrowings; (c) the costs of our deposits and other funding sources; (d) our net interest margin; and (e) the regulatory risk weighting associated with the assets. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

Noninterest Income. Noninterest income consists of, among other things: (a) gain on sale of loans; (b) loan servicing fees; (c) fair value adjustments to the value of servicing rights; (d) mortgage warehouse fees; and (e) syndication and asset management fees; and (f) other noninterest income.

Gain on sale of loans includes placement and origination fees, capitalized servicing rights, trading gains and losses, gains and losses on certain derivatives and other related income. Loan servicing fees are collected as payments are received for loans in the servicing portfolio and reduced by amortization on servicing rights. Fair value adjustments to the value of servicing rights are also included in noninterest income. Mortgage warehouse fees are accrued at the time of funding. Syndication fee income is recognized at the point in time when investor equity capital is obtained primarily to acquire qualifying investments in LIHTC projects for its funds. Related asset management fees for syndicated LIHTC or debt funds are recognized over time. Other noninterest income includes the recognition and changes in value to protective derivatives associated with certain investment securities, as well as income earned on joint ventures.

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Noninterest expense. Noninterest expense includes, among other things: (a) salaries and employee benefits, including commissions; (b) loan origination and servicing expenses; (c) occupancy and equipment expense; (d) professional fees; (e) FDIC insurance expense; (f) technology expense; (g) credit risk transfer premium expense; and (h) other general and administrative expenses.

Salaries and employee benefits includes commissions, other compensation, employee benefits, and employer tax expenses for our personnel.

Loan origination and servicing expenses include third party processing for financing activities and loan-related origination expenses. Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses. Equipment expense includes furniture, fixtures and equipment related expenses. Professional fees include legal, accounting, consulting and other outsourcing arrangements. FDIC insurance expense represents the assessments that we pay to the FDIC for deposit insurance. Technology expense includes data processing fees paid to our third-party data processing system provider, cybersecurity fees, and other data service providers. Credit risk transfer premium expense includes premiums paid for our credit default swap arrangements. Other general and administrative expenses include expenses associated with servicing expense, advertising, marketing, travel, meals, training, supplies, and postage, among other miscellaneous expenses.

Noninterest expenses generally increase as we grow our business. Noninterest expenses have increased significantly over the past few years as we have grown organically, and as we have built out and modernized our operational infrastructure and implemented our plan to build an efficient, technology-driven mortgage banking operation with significant operational capacity for growth.

Return on Average Equity.  Return on average equity is the measure of annual net income divided by the value of our total shareholders’ equity, expressed as a percentage.  It reflects how efficiently equity investments are turned into profits.  Changes in profitability and the ability to effectively manage levels of capital can influence this measure.  The higher the ratio, the more profitable our Company becomes.

Financial Condition

The primary factors we use to evaluate and manage our financial condition are asset levels, liquidity, capital and asset quality.

Asset Levels. We manage our asset levels based upon forecasted closings or fundings within our business segments to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Each segment evaluates its funding needs by forecasting the fundings and sales of loans, communicating with customers on their projected funding needs, and reviewing its opportunities to add new customers.

Liquidity. We manage our liquidity based upon factors that include: (a) our amount of custodial and brokered deposits as a percentage of total deposits (b) the level of diversification of our funding sources (c) the allocation and amount of our deposits among deposit types (d) the short-term funding sources used to fund assets (e) the amount of non-deposit funding used to fund assets (f) the availability of unused funding sources; (g) off-balance sheet obligations; (h) the availability of assets to be readily converted into cash without a material loss on the investment; (i) the amount of cash and cash equivalent; (j) the repricing characteristics of our assets; (k) maturity and duration of our assets when compared to the repricing characteristics of our liabilities; (l) costs of available funding options; and (m) other factors.

Capital. We manage our regulatory capital based upon factors that include: (a) the level and quality of capital and our overall financial condition; (b) risk weighting of our assets; (c) the trend and volume of problem assets; (d) the dollar amount of servicing rights as a percentage of capital; (e) the level and quality of earnings; (f) the risk exposures on our balance sheet as well as off-balance sheet exposures; and (g) other factors. In addition, we have continually increased our capital through net income less dividends and equity issuances. Our regulatory capital ratios can be influenced by various factors including levels of delinquency on loans.

Asset Quality. We manage the diversification and quality of our assets based upon factors that include: (a) the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets; (b) the adequacy of our ACL-Loans; (c) the diversification and quality of loan and investment portfolios; (d) the extent of counterparty risks; (e) credit risk concentrations; (f) the liquidity of our assets; and (g) other factors.

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Recent Developments and Material Trends

Economic and Interest Rate Environment. The results of our operations are highly dependent on economic conditions, mortgage volumes, and market interest rates. Residential mortgage volumes fluctuate based on market interest rates, economic conditions, and the credit parameters set by government agencies, such as Fannie Mae, Freddie Mac, and Ginnie Mae, and other market participants.

In response to rising inflation during 2022-2023, the Federal Reserve aggressively increased the federal funds rate. Starting from near-zero levels in early 2022, the rate was raised multiple times, reaching 5.33% by the end of 2023. This was the highest level since January 2008 and was aimed at curbing inflationary pressures. The 10-year Treasury yield, which is a key benchmark for mortgage rates, also saw significant increases. It rose from around 1.5% at the beginning of 2022 to approximately 3.88% by the end of 2023. This increase was driven by expectations of higher inflation and the Federal Reserve’s rate hikes. The 30-year mortgage rate followed a similar trend, rising sharply in response to the Federal Reserve’s rate hikes. It peaked at over 7% in 2022, the highest level since 2002, and remained elevated throughout 2023. The higher interest rates during this period significantly reduced mortgage affordability and refinancing activity, leading to a decline in mortgage volumes across the industry.

During 2024, the Federal Reserve began to cut interest rates and by the end of 2024, the federal funds rate had been reduced to around 4.33%. Following suit, the 30-year mortgage rate began to decline and by the end of 2024, it had fallen to approximately 6.85%. The rate cuts in 2024 began to revive the mortgage market. Lower mortgage rates improved affordability and spurred a resurgence in mortgage volumes, particularly in refinancing activity. Conversely, the 10-year Treasury yield had begun to decline, but in late-2024 began to rise on inflation expectations and strong economic growth. By the end of 2024, it had reached 4.58%. The broader economic environment in 2024 was characterized by strong economic growth, moderating inflation, and robust corporate earnings, which further supported the recovery in mortgage volumes.

Supporting this expectation are industry forecasts from the Mortgage Bankers Association, which has forecasted a 16% increase in single-family residential mortgage volume, to $2.055 trillion for 2025, from $1.779 trillion in 2024, and an increase of 15%, to $2.369 trillion in 2026, followed by an increase to $2.455 trillion for 2027. The higher rate environment has also slowed multi-family permanent, agency-eligible loan originations and sales to the secondary market, but improved by late 2024.

Regulatory Environment. We believe an important trend affecting community banks in the United States over the foreseeable future will be related to heightened regulatory capital requirements, regulatory burdens generally, and interest margin compression. We expect that troubled community banks could face significant challenges when attempting to raise capital. We also believe that heightened regulatory capital requirements will make it more difficult for even well-capitalized, healthy community banks to grow in their communities by taking advantage of opportunities in their markets that result as the economy improves. We believe these trends will favor community banks that have sufficient capital, a diversified business model and a strong deposit franchise.

ACL-Loans. One of our key operating objectives has been, and continues to be, maintenance of an appropriate level of ACL-Loans in our loan portfolio. The provision for credit losses recorded in prior years was primarily due to growth in our loan portfolio, as our historical loss rates remained very low. As we anticipate that our loan portfolio overall will continue to grow in 2025, we could expect the provision to increase, but could also be influenced by any changes to problem loans in our portfolio or the loan type mix within the portfolio. It could also be influenced by external market factors, such as interest rates and the economic environment. Additional details are provided in the ACL-Loans portion of the Comparison of Financial Condition at December 31, 2024 and December 31, 2023. Because there could be unforeseen future losses, the Company continues to monitor the situation and may need to adjust future expectations as developments occur.

Issuance and Redemption of 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

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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.

On April 1, 2024, the Company redeemed all outstanding shares of the 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock at a price equal to the liquidation preference of $25 per share, or $52.0 million, using cash on hand.

As of October 1, 2024, the dividends on the Series B Preferred Stock started to accrue at a floating rate of 3-month SOFR plus 4.831% and were to reset quarterly. The rate was 9.42% for the three months ended December 31, 2024. See “Capital Resources” section of “Liquidity”, later in this Item 7 for more information.

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.

On January 2, 2025, the Company redeemed all outstanding shares of the 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock at a price equal to the liquidation preference of $1,000 per share (equivalent to $25 per depositary share), or $125.0 million, using cash on hand.

Issuance of Common Stock. On May 16, 2024, the Company completed a common stock offering of 2.4 million shares, resulting in net proceeds of $97.7 million.

Credit Risk Transfers, Loan Sales and Securitizations. Growth in the loan origination pipeline has prompted the Company to seek additional avenues to effectively manage regulatory capital levels and reduce credit risk, in addition to issuing preferred and common stock. Accordingly, we have completed several loan sale and securitization transactions, as well as credit default swaps and credit linked notes. In doing so, the Company has been able to effectively reduce its risk-weighted assets and maintain well-capitalized capital ratios. Also see Note 5: Loans and Allowance for Credit Losses on Loans.

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General and Administrative Expenses. We expect to continue incurring increased noninterest expense attributable to general and administrative expenses related to building out and modernizing our operational infrastructure, marketing, and other administrative expenses to execute our strategic initiatives, as well as expenses to hire additional personnel and other costs required to continue our growth. We also expect costs to increase with additional regulatory compliance requirements.

Comparison of Operating Results for the Years Ended December 31, 2024 and 2023

General. Net income of $320.4 million for the year ended December 31, 2024 increased by $41.2 million, or 15%, compared to net income of $279.2 million for the year ended December 31, 2023. The increase was primarily driven by a $74.5 million, or 17%, increase in net interest income, a $33.4 million, or 29%, increase in noninterest income, as well as $16.0 million, or 40%, decrease in provision for credit losses. The increases to net income were partially offset by a $49.2 million or 28%, increase in noninterest expense.

Net Interest Income. Net interest income of $522.6 million for the year ended December 31, 2024 increased $74.5 million, or 17%, compared to $448.1 million for the year ended December 31, 2023. The 17% increase reflected a $224.9 million, or 21% increase in interest income from higher average balances and yields on loans and loans held for sale, and higher average balances of securities held to maturity, as well as higher yields and average balances on securities available for sale. These increases were partially offset by a $150.4 million, or 24%, increase in interest expense primarily due to higher average balances on borrowings, as well as higher average balances and rates on certificates of deposit and interest-bearing checking.

The interest rate spread of 2.47% for the year ended December 31, 2024, decreased 4 basis points compared to 2.51% for the year ended December 31, 2023. Our net interest margin decreased 3 basis points, to 3.03%, for the year ended December 31, 2024 from 3.06% for the year ended December 31, 2023.

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Interest Income. Interest income of $1.3 billion for the year ended December 31, 2024 increased $224.9 million, or 21%, compared to $1.1 billion for the year ended December 31, 2023. This increase was primarily attributable to higher average balances and yields on loans and loans held for sale, and higher average balances of securities held to maturity, as well as higher yields and average balances on securities available for sale. The higher yields were in response to higher interest rates set by the Federal Reserve.

Interest income of $1.1 billion for loans and loans held for sale increased $153.7 million, or 16%, during 2024. The average balance of loans, including loans held for sale, during the year ended December 31, 2024 increased $1.8 billion, or 14%, to $14.2 billion compared to $12.4 billion for the year ended December 31, 2023. The average yield on loans increased 12 basis points, to 7.85% for the year ended December 31, 2024, compared to 7.73% for the year ended December 31, 2023. The increase in average balances of loans and loans held for sale was primarily due to increases in the mortgage warehouse and multi-family portfolios, partially offset by a decrease in the healthcare portfolio associated with a sale of loans as part of a securitization transaction. The higher average yield reflected the impact of the Federal Reserve increase in market rates.

Interest income of $90.1 million for securities held to maturity increased $20.1 million, or 29%, during 2024. The average balance of securities held to maturity, during the year ended December 31, 2024 increased $240.2 million, to $1.3 billion compared to $1.1 billion for the year ended December 31, 2023. The average yield on securities held to maturity increased 35 basis points, to 6.73 % for the year ended December 31, 2024, compared to 6.38% for the year ended December 31, 2023. The increase in average balance of securities held to maturity was primarily related to held to maturity securities acquired as part of loan securitizations that the Company originated.

Interest income of $57.5 million on securities available for sale increased $35.9 million, or 166%, during 2024. The average balance of securities available for sale increased $406.6 million, or 65%, to $1.0 billion for the year ended December 31, 2024, from $623.7 million for the year ended December 31, 2023. The average yield increased 211 basis points, to 5.58% for the year ended December 31, 2024, compared to 3.47% for the year ended December 31, 2023. The increase in average yield reflects the acquisition of a private label security from a warehouse customer as part of a securitization in December 2023. The increase in average balances of securities available for sale was primarily associated with the acquisition of certain securities from a warehouse customer that provide protective put options and interest rate floor derivatives to prevent losses in value.

Interest income of $27.3 million on interest-earning deposits and other interest or dividends increased $13.5 million, or 97%, during 2024. The average balance of interest-earning deposits and other increased $201.7 million, or 84%, to $442.4 million for the year ended December 31, 2024, from $240.8 million for the year ended December 31, 2023. The average yield increased 43 basis points, to 6.17% for the year ended December 31, 2024, compared to 5.74% for the year ended December 31, 2023. The increase in average balances reflected higher dividends associated with the purchase of additional shares of FHLB stock and the purchase of other equity securities.

Interest income of $14.5 million for mortgage loans in process or securitization increased $1.8 million, or 15%, during 2024. The average balance of mortgage loans in process of securitization increased $16.8 million, or 7%, to $274.4 million for the year ended December 31, 2024 compared to the year ended December 31, 2023. The average yield increased 37 basis points, to 5.28% for the year ended December 31, 2024, compared to 4.91% for the year ended December 31, 2023. The increase in average balances was primarily due to a higher origination volume of loans pending settlement for sale on the secondary market.

Interest Expense. Total interest expense of $780.1 million for the year ended December 31, 2024 increased $150.4 million or 24%, compared to $629.7 million for the year ended December 31, 2023.

Interest expense on deposits increased $83.1 million, or 14%, to $660.4 million for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was primarily due to higher average balances and rates on certificates of deposit and higher average balances on interest-bearing checking accounts. The higher rates on our deposits were primarily due to the change in market rates.

Interest expense of $285.9 million for certificate of deposit accounts increased $52.8 million during 2024. The average balance of certificates of deposit of $5.3 billion for the year ended December 31, 2024 increased $751.0 million, or 16%, compared to $4.6 billion for the year ended December 31, 2023. The average rate on certificates of deposit was 5.35% for the year ended December 31, 2024, which was a 27 basis point increase compared to 5.08% for year ended

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December 31, 2023. The increase in certificates of deposit is in part due to the implementation of our new online account opening system which has made it more efficient for existing customers to open accounts as well as broaden our customer base to reach new markets.

Interest expense of $240.2 million for interest-bearing checking accounts increased $23.7 million during 2024. The average balance of interest-bearing checking accounts of $5.2 billion for the year ended December 31, 2024 increased $505.2 million, or 11%, compared to $4.7 billion for the year ended December 31, 2023. The average yield of interest-bearing checking accounts was 4.60% for the year ended December 31, 2024, which was a 1 basis point increase compared to 4.59% for year ended December 31, 2023.

Interest expense of $134.0 million for money market accounts increased $7.6 million during 2024. The average balance of money market accounts of $2.8 billion for the year ended December 31, 2024 increased $40.4 million, or 1%, compared to the year ended December 31, 2023. The average yield of money market accounts was 4.71% for the year ended December 31, 2024, which was a 20 basis point increase compared to 4.51% for year ended December 31, 2023.

Interest expense on borrowings increased $67.2 million, or 128%, to $119.7 million for the year ended December 31, 2024 from $52.5 million for the year ended December 31, 2023. The increase in interest was primarily due to an increase of $1.2 billion, or 192%, in the average balance of borrowings of $1.8 billion compared to $627.5 million for the year ended December 31, 2023. The higher level of collateralized borrowing, largely from the FHLB, was primarily due to it being a more cost-effective funding option than utilizing brokered deposits. There was a 184 basis point decrease in the average cost of borrowings to 6.53%, compared to 8.37% for the year ended December 31, 2023.

Included in interest expense on borrowings, our warehouse structured financing agreements provide for additional interest payments for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 6.25% and 8.36%, to an effective rate of 6.53% and 8.37% for the year ended December 31, 2024 and 2023, respectively.

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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.

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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:

Provision for Credit Losses. We recorded a total provision for credit losses of $24.3 million for the year ended December 31, 2024, a decrease of $16.0 million, compared to the year ended December 31, 2023.

The $24.3 million total provision for credit losses consisted of $23.7 million for the ACL-Loans, $2.2 million for the ACL-OBCEs, net of $1.0 million for the ACL-Guarantees for the release of reserves related to a loan securitization and $0.6 million for the release of FMBI’s ACL-Loans for loans sold.

The ACL-Loans was $84.4 million, or 0.81% of loans receivable at December 31, 2024, compared to $71.8 million, or 0.70% of loans receivable at December 31, 2023. The higher ACL-Loans reflected increases associated with specific reserves, loan growth, and adjustments to qualitative loss factors that were partially offset by charge-offs. Additional details are provided in the ACL-Loans portion of the Comparison of Financial Condition at December 31, 2024 and 2023, and in Note 1: Nature of Operations and Significant Accounting Policies and Note 5: Loans and Allowance for Credit Losses.

Noninterest Income. Noninterest income of $148.1 million for the year ended December 31, 2024 increased $33.4 million, or 29%, compared to $114.7 million for the year ended December 31, 2023. The increase was primarily due to higher gain on sale, increased loan servicing fees, and higher syndication and asset management fees. The increases were partially offset by a decrease in other noninterest income.

Gain on sale of loans of $62.3 million for the year ended December 31, 2024 increased $14.1 million, or 29%, compared to $48.2 million for the year ended December 31, 2023. The increase in gain on sale of loans reflects the successful execution of the Company’s strategy to grow the business segment and to increase non-interest income.

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A summary of the gain on sale of loans for the years ended December 31, 2024 and 2023 is below:

Loan servicing fees of $43.7 million for the year ended December 31, 2024 increased $17.5 million, or 67%, compared to $26.2 million for the year ended December 31, 2023. Loan servicing fees included a $22.7 million positive adjustment to the fair value of servicing rights for the year ended December 31, 2024, compared to a $4.6 million positive adjustment to the fair value of servicing rights for the year ended December 31, 2023.

Syndication and asset management fees of $19.7 million for the year ended December 31, 2024 increased $7.3 million, or 59%, for the year ended December 31, 2024 compared to $12.4 million the year ended December 31, 2023. The increase was attributable to the additional $1.1 billion in equity raised by our LIHTC syndication platform during 2024.

Other noninterest income of $17.0 million for the year ended December 31, 2024 decreased $3.2 million, or 16%, compared to the year ended December 31, 2023. Other noninterest income included a $2.5 million negative adjustment to the fair value of floor derivatives for the year ended December 31, 2024 compared to a $6.6 million positive fair value adjustment for the year ended December 31, 2023. 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 year ended December 31, 2024 there was a $17.9 million negative fair value adjustment on the securities that were offset by a $17.9 million positive fair value adjustment on the put options, hence having no net gain or loss recognized. Also see Note 3: Investment Securities, Note 15: Derivative Financial Instruments, and Note 16: Disclosures about Fair Value of Assets and Liabilities.

Noninterest Expense. Noninterest expense of $223.8 million for the year ended December 31, 2024 increased $49.2 million, or 28%, compared to $174.6 million for the year ended December 31, 2023. The increase was due primarily to a $22.5 million, or 21%, increase in salaries and employee benefits associated with higher commissions on higher production volume and to support business growth, a $12.6 million, or 93% increase in FDIC deposit insurance expenses that reflected the transition in classification to a large bank exceeding $10 billion in assets, an increase in criticized loans, and the growth in assets that increased our base assessment. Also contributing to the increase was a $6.3 million increase in credit risk transfer premium expense associated with ongoing credit default swaps that were executed in March and December 2024.

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The efficiency ratio was at 33.37% for the year ended December 31, 2024, compared with 31.03% for the year ended December 31, 2023.

Income Taxes. Provision for income tax of $102.3 million for the year ended December 31, 2024 increased $33.6 million, or 49%, compared to $68.7 million for the year ended December 31, 2023. The increase was primarily due to a $12.2 million tax benefit recorded in 2023 related to tax refunds and changes to state apportionment calculations, as well as higher pre-tax income. The effective tax rate was 24.2% for the year ended December 31, 2024 and 19.7% for the year ended December 31, 2023.

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Asset Quality

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Although there has been an increase in adversely classified loans, asset values remain strong overall and loans are well-collateralized. Loans are underwritten to strict agency guidelines. We continually strive to strengthen our various levels of credit and risk management.

Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $279.7 million, or 2.68% of total loans receivable, at December 31, 2024, compared to $82.0 million, or 0.80% of total loans receivable, at December 31, 2023. The increase in nonperforming loans compared to both periods was driven by multi-family and healthcare customers with delinquent payments on variable rate loans that have required higher payments largely due to elevated interest rates since origination. The increase was also attributable to the financial deterioration of a few sponsors. Credit quality is expected to improve with the recent reduction in interest rates. 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 30% at December 31, 2024 compared to 87% at December 31, 2023. The decrease in percentage compared to both periods was due to an increase in nonperforming loans, substantially all of which have been individually evaluated for impairment.

In addition to elevated reserves for credit losses on loans compared to December 2023, the Company has been making additional efforts to reduce its credit risk through loan sale and securitization activities since 2019. In April 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, totaling $2.9 billion in loans on the closing date, to reduce risk of losses, with incremental coverage ranging from 13-14% of the unpaid principal balances for each arrangement. These loans have credit protection and also have an allowance for credit losses. As of December 31, 2024, the balance of loans in credit protection arrangements was $2.3 billion, compared to $934.6 million as of December 31, 2023.

Total loans greater than 30 days past due were $292.3 million at December 31, 2024 compared to $183.5 million at December 31, 2023. The increase in delinquent loans compared to both periods was primarily driven by multi-family customers with delinquent payments on variable rate loans that have required higher payments due to interest rates remaining at elevated levels.

Loans classified as Special Mention totaled $380.0 million at December 31, 2024 compared to $191.3 million at December 31, 2023. The increase was primarily due to the increase in interest rates for our borrowers and the related levels of net operating income on certain properties in the multi-family and healthcare financing loan portfolios.

Loans classified as Substandard loans totaled $317.3 million at December 31, 2024 compared to $128.6 million at December 31, 2023. The increase was primarily due to the increase in interest rates for our borrowers and the related levels of net operating income on certain properties in the multi-family financing loan portfolio. Substantially all substandard loans as of December 31, 2024 have been evaluated for impairment and these loans have specific reserves of $23.4 million. Although there has been an increase in adversely classified loans, underlying asset values remain strong overall and loans are well-collateralized.

For the year ended December 31, 2024, there were $10.6 million of charge offs primarily related to four customers and $136,000 of recoveries compared to $9.8 million of charge offs and $41,000 of recoveries during the year ended December 31, 2023.

The percentage of commercial real estate loans as a percentage of total Tier I risk-based capital, including the ACL-Loans, has decreased from 455% to 348% for the years ended December 31, 2023 and 2024, respectively.

Operating Segment Analysis for the Years Ended December 31, 2024 and 2023

We operate in three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, as discussed in “Our Business Segments” of Item 1 and Note 23: Segment Information. The reportable segments are consistent with the internal reporting and evaluation of the principal lines of business of the Company.

Our segment financial information was compiled utilizing the policies described in Note 1: Nature of Operations and Summary of Significant Accounting Policies, and Note 23: Segment Information, included elsewhere in

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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 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 23: 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.

The following table presents our primary operating results for our operating segments for the years ended December 31, 2024 and 2023.

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Multi-family Mortgage Banking. The Multi-family Mortgage Banking segment reported net income of $55.9 million for the year ended December 31, 2024, an increase of $19.4 million, or 53%, compared to $36.5 million reported for the year ended December 31, 2023. The increase was primarily due to higher noninterest income that was partially offset by increased noninterest expense and provision for income taxes.

The $44.0 million increase in noninterest income reflected a $20.0 million increase in loan servicing fees, a $15.2 million increase in gain on sale of loans, as sales to the secondary market increased, and a $6.2 million increase in syndication and asset management fees.

Loan servicing fees reflected a positive fair market value adjustment of $20.5 million on servicing rights for the year ended December 31, 2024 compared to a positive fair market value adjustment of $3.9 million for the year ended December 31, 2023.

The $15.2 million increase in gain on sale of loans reflects the successful execution of the Company’s strategy to grow the business segment and to increase non-interest income.

The $11.1 million increase in provision for income tax expense reflected tax benefits recorded in 2023 related to tax refunds and changes to state apportionment calculations, as well as higher pre-tax income in 2024.

The total volume of loans originated and acquired through our multi-family business was $6.2 billion for the year ended December 31, 2024 and unchanged compared to the year ended December 31, 2023. Loans originated include bridge loans housed in our Banking segment while borrowers await conversion to permanent financing. The volume of bridge loans was $1.9 billion for the year ended December 31, 2024, a decrease of $1.1 billion, or 36%, compared to $3.0 billion for the year ended December 31, 2023. The volume of loans originated and acquired for sale in the secondary market increase by $562.8 million, or 29%, to $2.5 billion, compared to $2.0 billion for the year ended December 31, 2023.

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Total assets in the Multi-family segment increased 17%, to $479.1 million at December 31, 2024, compared to $411.1 million at December 31, 2023.

Mortgage Warehousing. The Mortgage Warehousing segment reported net income of $82.8 million for the year ended December 31, 2024, an increase of $9.3 million, or 13%, compared to $73.5 million for the year ended December 31, 2023. The higher net income reflected a $37.7 million increase in net interest income, partially offset by an $11.3 million decrease in noninterest income that primarily reflected a negative fair market value adjustment to certain derivatives.

The volume of loans funded during the year ended December 31, 2024 amounted to $45.6 billion, an increase of $12.6 billion, or 38%, compared to $33.0 billion for the same period in 2023. This compared to the 9% industry

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increase in single-family residential loan volumes from the year ended December 31, 2024 to the year ended December 31, 2023, according to the Mortgage Bankers Association.

Total assets in the Mortgage Warehousing segment increased 33%, to $6.0 billion, at December 31, 2024, compared to $4.5 billion at December 31, 2023.

Banking. The Banking segment reported net income for the year ended December 31, 2024 of $210.1 million, an increase of $15.7 million, or 8%, compared to $194.4 million for the year ended December 31, 2023. The increase was primarily due to a $33.0 million increase in net interest income from higher balances of multi-family bridge loans and a $4.0 million increase in noninterest income. These were partially offset by a $19.9 million increase in noninterest expense, primarily due to increases deposit insurance expense and credit risk transfer premium expense related to credit default swap agreements executed during 2024.

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Noninterest income for the year ended December 31, 2024 included a positive fair market value adjustment of $2.2 million on single-family servicing rights compared to a positive fair market value adjustment of $688,000 for the year ended December 31, 2023.

Total assets in the Banking segment remain unchanged at $11.8 billion at December 31, 2024, compared to December 31, 2023.

See “Our Business Segments,” in Item 1 “Business”, and Note 23: Segment Information, for further information about our segments.

Financial Condition

As of December 31, 2024, we had approximately $18.8 billion in total assets, $11.9 billion in deposits, $4.4 billion in borrowings and $2.2 billion in total shareholders’ equity. Total assets as of December 31, 2024 included approximately $10.4 billion of loans receivable, net of ACL-Loans and $3.8 billion of loans held for sale. There were also $1.7 billion in securities classified as held to maturity, most of which were acquired through loan securitizations. Assets also included $980.1 million in securities available for sale, the majority of which were acquired from a warehouse customer through loan securitizations, 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. The $571.3 million in other assets primarily includes low-income housing tax credits and a prepaid expense associated with the January 2, 2025 redemption of the Series B Preferred Stock. Additionally, we had $476.6 million of cash and cash equivalents, $428.2 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 December 31, 2024 were $189.9 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 December 31, 2024 and 2023

Total Assets. Total assets of $18.8 billion at December 31, 2024 increased 11%, compared to $17.0 billion at December 31, 2023. The increase was due primarily to growth in loans and loans held for sale, as well as an increase in securities held to maturity compared to December 31, 2023, primarily due to the purchase of a security representing healthcare loans sold into a securitization in 2024 that was offset by a decline in loans in the healthcare portfolio that were sold into the securitization. There was also an increase in mortgage loans in process of securitization due to increased activity in the secondary market.

Cash and Cash Equivalents. Cash and cash equivalents of $476.6 million at December 31, 2024 decreased $107.8 million, or 18%, compared to December 31, 2023. Included in cash equivalents was $33.5 million in restricted cash associated with senior credit linked notes described in Note 1: Nature of Operations and Summary of Significant Accounting Policies and Note 14: Borrowings.

Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization of $428.2 million at December 31, 2024 increased $317.6 million, or 287%, compared to $110.6 million at December 31, 2023. These

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represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities with a firm investor commitment to purchase the securities. The 287% increase was primarily due to a higher origination volume of loans pending settlement.

Securities Available for Sale. Securities available for sale of $980.1 million at December 31, 2024 decreased $133.6 million, or 12%, compared to $1.1 billion at December 31, 2023. The decrease in securities available for sale was primarily due to $917.8 million in calls, maturities, repayments, sales and other adjustments, partially offset by purchases of $784.2 million during the period.

Included in securities available for sale were $635.9 million and $722.5 million of investment for which a fair value option was elected at December 31, 2024 and 2023, respectively. Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the consolidated balance sheets with changes in the fair value recognized in earnings as they occur.

As of December 31, 2024, AOCL of $0.1 million, related to securities available for sale, decreased $2.4 million, or 95%, compared to accumulated losses of $2.5 million at December 31, 2023. The $0.1 million of AOCL as of December 31, 2024 represented less than 1% of total equity or total securities available for sale.

Securities Held to Maturity. Securities held to maturity of $1.7 billion at December 31, 2024 increased $460.5 million, or 38%, compared to $1.2 billion at December 31, 2023. The increase was primarily due to purchases of $689.8 million, the majority of which was from a security acquired as part of a healthcare loan securitization. This was partially offset by calls, maturities and repayments of securities totaling $229.5 million during the period.

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Loans Held for Sale. Loans held for sale of $3.8 billion at December 31, 2024 increased $626.8 million, or 20%, compared to $3.1 billion at December 31, 2023. 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 a growing contribution of multi-family loans that are expected to be sold or securitized within the next year.

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Loans Receivable, Net. The following table shows our allocation of loans receivable as of the dates presented:

Loans receivable, net of ACL-Loans, of $10.4 billion at December 31, 2024, increased $226.2 million, or 2%, compared to $10.1 billion at December 31, 2023. The increase was comprised primarily of:

As of December 31, 2024, approximately 94% of the total net loans reprice within three months, which reduces the risk of market rate fluctuations.

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The Company is a nationwide lender, especially in our largest portfolios of multi-family and healthcare financing. The tables below provide loans receivable for these two portfolios, including the five highest geographic concentrations.

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The following table presents the contractual maturity distribution of loans receivable at December 31, 2024 and an analysis of these loans that have fixed and floating interest rates. The table does not take into account repricing or other forecast assumptions.

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ACL-Loans. The following table presents an analysis of the ACL-Loans for the periods presented:

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The following table presents an analysis of the ACL-Loans for the periods presented:

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The following table sets forth the amounts of nonperforming loans and nonperforming assets at the dates indicated:

The ACL-Loans of $84.4 million at December 31, 2024 increased $12.6 million, or 18%, compared to $71.8 million at December 31, 2023, reflecting an $16.7 million net increase in specific reserves, primarily related to five customers, and loan growth in multi-family loan portfolios. This increase was partially offset by lower loan balances due to the securitization of healthcare loans, which reduced the allowance by approximately $4.4 million.

Also influencing the overall level of the ACL-Loans is our differentiated strategy to typically hold loans with shorter durations while maintaining agency underwriting standards that enable us to sell or refinance the majority of our loans under agency and government programs.

The $84.4 million allowance for credit losses on loans as of December 31, 2024, compared to the net charge offs of $10.5 million over the last twelve months ended December 31, 2024, could absorb eight years of losses, assuming recent loss levels continue.

Premises and Equipment, Net.  Premises and equipment, net, of $58.6 million at December 31, 2024 increased $16.3 million, or 38%, compared to $42.3 million at December 31, 2023. The increase was primarily due to an increase in work in process as we expand our headquarters to support business growth.

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Goodwill.   Goodwill of $8.0 million at December 31, 2024 decreased $7.8 million, or 49%, compared to $15.8 million at December 31, 2023. The goodwill associated with FMBI was extinguished upon the sale of their branches to unaffiliated third parties on January 26, 2024.

Servicing Rights. Servicing rights of $189.9 million at December 31, 2024 increased $31.5 million, or 20%, compared to December 31, 2023. During the year ended December 31, 2024, originated servicing of $18.7 million and a positive fair market value adjustment of $22.7 million were partially offset by paydowns of $9.9 million. The $22.7 million positive fair market value adjustment consisted of a positive fair market value adjustment of $20.5 million for multi-family and healthcare mortgages and a positive fair market value adjustment of $2.2 million for single-family mortgages and SBA loans during the year ended December 31, 2024.

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 increase recorded during the year ended December 31, 2024 was driven by higher 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 earnings rates on escrow deposits.

Other Assets and Receivables.   Other assets and receivables of $571.3 million at December 31, 2024 increased $264.2 million, or 86%, compared to $307.1 million at December 31, 2023. The 86% increase in other assets and receivables was primarily due to investments and receivables associated with low-income housing tax credit investments and prepaid assets associated with the January 2, 2025 redemption of Series B Preferred Stock.

Deposits. Deposits of $11.9 billion at December 31, 2024 decreased $2.1 billion, or 15%, compared to $14.1 billion at December 31, 2023. The 15% decrease in total deposits was primarily due to a $1.2 billion decrease in certificates of deposit and a $1.3 billion decrease in demand deposits and a decrease, partially offset by an increase of $450.0 million in savings deposits. As of December 31, 2024, approximately 79% of the total deposits reprice within three months.

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Core deposits increased by $1.3 billion, or 16%, to $9.4 billion at December 31, 2024 compared to December 31, 2023. Core deposits represented 79% of total deposits at December 31, 2024 compared to 58% of total deposits at December 31, 2023.

We have decreased our use of total brokered deposits by $3.4 billion, or 58%, to $2.5 billion at December 31, 2024 compared to December 31, 2023. Brokered deposits represented 21% of total deposits at December 31, 2024, compared to 42% of total deposits at December 31, 2023.

Interest-bearing deposits decreased $1.9 billion, or 14%, to $11.7 billion at December 31, 2024 compared to December 31, 2023, and noninterest-bearing deposits decreased $281.1 million, or 54%, to $239.0 million at December 31, 2024 compared to December 31, 2023.

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Uninsured deposits totaled approximately $2.8 billion as of December 31, 2024, representing less than 24% of total 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 $1.6 billion as of December 31, 2024 and 2023.

The following tables show the average balance amounts and the average contractual rates paid on our deposits for the periods indicated:

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The following table shows time deposits of $250,000 or more by time remaining until maturity:

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Borrowings. Borrowings of $4.4 billion at December 31, 2024 increased $3.4 billion, or 355%, from $964.1 million at December 31, 2023. The increase was primarily due to $3.4 billion in additional FHLB advances. The higher level of collateralized borrowing was primarily due to it being a more cost-effective funding option than utilizing brokered deposits. 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 14: Borrowings for further information.

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The Company continues to have significant borrowing capacity based on available collateral. As of December 31, 2024, unused lines of credit totaled $4.3 billion, compared to $6.0 billion at December 31, 2023. The Company’s ratio of total collateralized borrowing capacity to total assets increased from 40% as of December 31, 2023 compared to 46% as of December 31, 2024.

The following table sets forth certain information regarding our borrowings at the dates and for the periods indicated:

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Other Liabilities. Other liabilities of $231.0 million at December 31, 2024 increased $25.1 million, or 12%, compared to $205.9 million at December 31, 2023. The 12% increase in other liabilities was primarily unfunded commitments for low-income housing credit investments partially offset by a change in the valuation for back-to-back swap derivatives.

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Total Shareholders’ Equity. Shareholders’ equity was $2.2 billion as of December 31, 2024, compared to $1.7 billion as of December 31, 2023. The $542.2 million, or 32%, increase resulted primarily from net income of $320.4 million and net proceeds of $222.7 million from a preferred stock offering, $97.7 million from a common stock offering, which was partially offset by redemption of 7% Series A Preferred Stock for $52.0 million and dividends paid on common and preferred shares of $51.2 million during the period.

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.

At December 31, 2024, based on collateral, we had $4.3 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. This compared to $6.0 billion at December 31, 2023. While the amounts available fluctuate daily, we also had available capacity lines through our membership in the AFX. This liquidity enhances the 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 $4.3 billion described above, these totaled $10.4 billion, or 55%, of its $18.8 billion total assets at December 31, 2024. 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 deposits. Our line of credit with the Federal Reserve Bank of Chicago, alone, could fund 111% 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 $1.6 billion and $1.6 billion as of December 31, 2024 and 2023, 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 December 31, 2024, AOCL of $0.1 million, related to securities available for sale, decreased $2.4 million, or 95%, compared to accumulated losses of $2.5 million as of December 31, 2023. The $0.1 million of AOCL as of December 31, 2024 represented less than 1% of total equity or 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 used in operating activities was $(835.3) million and $(356.4) million for the years ended December 31, 2024 and 2023, 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 $(874.3) million and $(3.3) billion for the years ended December 31, 2024 and 2023, respectively. Net cash provided by financing activities, which is comprised primarily of borrowing activities and net change in deposits was $1.6 billion and $4.0 billion for the years ended December 31, 2024 and 2023, respectively.

Certificates of deposit that are scheduled to mature in less than one year from December 31, 2024 totaled $3.8 billion, or 98%, of total certificates of deposit. Management expects that a substantial portion of the maturing 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.

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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 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 December 31, 2024, we had $4.7 billion in outstanding commitments to extend credit that are subject to credit risk and $3.7 billion in outstanding commitments subject to certain performance criteria and cancellation by the Company, including loans pending closing, unfunded construction draws, and unfunded warehouse repurchase agreements. 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.

For more information about our loan commitments, unused lines of credit and standby letters of credit, see Note 26: Commitments, Credit Risk, and Contingencies.

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 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. Shareholders’ equity was $2.2 billion as of December 31, 2024, compared to $1.7 billion as of December 31, 2023. The $542.2 million, or 32%, increase resulted primarily from net income of $320.4 million, net proceeds of $222.7 million from a preferred stock offering, and $97.7 million from a common stock offering, which was partially offset by redemption of 7% Series A Preferred Stock for $52.0 million and dividends paid on common and preferred shares of $51.2 million during the period.

The Company redeemed all outstanding shares of the Series A Preferred Stock on April 1, 2024 for $52.0 million at a price equal to the liquidation preference of $25 per share, using cash on hand.

On October 1, 2024, the dividends on the Series B Preferred Stock started to accrue at a floating rate of 3-month SOFR plus 4.831% and were to reset quarterly. The rate was 9.42% for the three months ended December 31 2024.

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, using cash on hand. 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 for preferred shareholders in 2024 totaled $34.9 million. After the redemption of Series B preferred stock in January, $10.3 million in dividends are expected be declared to preferred shareholders in the first quarter of 2025. For more information, see Note 18: Preferred Stock.

Common Shares/Dividends. On May 13, 2024, the Company issued 2.4 million 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.

As of December 31, 2024, the Company had 45,767,166 common shares issued and outstanding. The Board declared a quarterly dividend of $0.09 per share in each quarter of 2024 and expects to raise its dividend in 2025. The Board declared a quarterly dividend of $0.10 per share for the first quarter of 2025.

Capital Adequacy.

The following tables present the Company’s capital ratios at December 31, 2024 and 2023.

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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 December 31, 2024 and December 31, 2023, that the Company and Merchants Bank met all capital adequacy requirements to which they were subject.

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As of December 31, 2024 and December 31, 2023, 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.

FMBI was subject to these measures prior to the sale of its branches and the merger of its remaining charter into Merchants Bank in January 2024. As of December 31, 2023, FMBI met all capital adequacy requirements (as set forth in the table above). The FDIC categorized FMBI as well capitalized at that time and there are no conditions or events since that notification that management believes would have changed that category.

Contractual obligations

The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities as of December 31, 2024. The payment amounts represent those amounts contractually due to the recipients.

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Also see Note 1: Nature of Operations and Summary of Significant Accounting Policies, Note 6: Premises and Equipment, Note 10: Leases, Note 13: Deposits, Note 14: Borrowings, and Note 26: Commitments, Credit Risk, and Contingencies as of December 31, 2024.

Critical Accounting Policies and Estimates

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The following represent our critical accounting policies:

ACL-Loans. The Company adopted CECL on January 1, 2022. CECL replaced the previous “Allowance for Loan and Lease Losses” standard for measuring credit losses. Upon adoption of CECL, the difference in the two measurements was recorded in the ACL-Loans and retained earnings.

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 charged to net interest income as loans are recorded in the 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 uncollectability of a loan balance, or a portion thereof, is confirmed. 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. There have been no changes to the credit quality components used to assess risk during the twelve months ended December 31, 2024. 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 is believed to be adequate to absorb current 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 segmenting loans with similar risk characteristics. Loan characteristics used in determining the segmentation include the underlying collateral, type or purpose of the loan, and expected credit loss patterns. 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.

Additional information regarding ACL-Loans estimates can be found in Note 1: Nature of Operations and Summary of Significant Accounting Policies and Note 5: Loans and Allowance for Credit Losses on Loans.

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Servicing Rights. Servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Servicing rights resulting from the sale or securitization of loans originated by us are initially measured at fair value at the date of transfer. We have elected to initially and subsequently measure the servicing rights for mortgage loans using the fair value method. Under the fair value method, the servicing rights are

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carried on the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.

Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model is from an independent third party and it incorporates assumptions that market participants would use in estimating future net servicing cash flows, such as the cost to service, the discount rate, the custodial assets earnings rate, an inflation rate, ancillary income, prepayment speeds, prepayment penalties, and default rates and losses. We review the reasonableness of the assumptions and the methodology to ensure the estimated fair value complies with GAAP. These variables change from quarter to quarter as market conditions and projected interest rates change and may have an adverse impact on the value of the mortgage-servicing right and may result in a reduction to noninterest income.

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by us can be found in Note 16: Disclosures About Fair Value of Assets and Liabilities.

Recently Issued Accounting Pronouncements

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of December 31, 2024, see Note 1: Nature of Operations and Summary of Significant Accounting Policies.