Moody's Affirms Ratings of Merchants Bancorp and Subsidiary Merchants Bank of Indiana

Strategic Insights -

Moody's Investors Service has affirmed the ratings and assessments of Merchants Bancorp and its lead bank subsidiary, Merchants Bank of Indiana. The affirmation reflects the company's improved capital profile and modestly lower commercial real estate (CRE) concentration, which are offset by a recent rise in nonperforming loans. Merchants' tangible common equity/risk-weighted assets ratio on a Moody's Ratings-adjusted basis grew to 9.2% at 31 March 2025 from 7.8% at year-end 2023.

Key Takeaways:

  • Merchants Bancorp and its subsidiary Merchants Bank of Indiana have affirmed ratings, with a long-term local currency issuer rating of Ba1 and long-term and short-term local currency bank deposit ratings of Baa1/Prime-2.
  • The company's capital profile has improved, with a tangible common equity/risk-weighted assets ratio of 9.2% as of 31 March 2025.
  • Commercial real estate concentration has modestly declined to 4.5x from 6.1x over the same period.
  • Nonperforming loans have risen to 2.5% at 31 March 2025 from 0.6% at year-end 2023, highlighting stress on some borrowers from elevated interest rates.
  • Merchants' securities portfolio has minimal unrealized losses, due to its short duration.
  • The company's business mix remains heavily focused on originating loans for multifamily residential and healthcare properties, with an emphasis on federal agency guidelines.
  • Merchants' loans are largely underwritten to federal agency guidelines, providing multiple avenues for disposition.
  • The outlook on the long-term local currency bank deposit and issuer ratings of Merchants Bank of Indiana was changed to stable from negative.
  • The outlook on the long-term local currency issuer rating of Merchants Bancorp was changed to stable from positive.
  • Merchants' net charge-off levels rose to 30 basis points annualized in Q1 2025 and could climb further if interest rates do not decline.
  • Higher net charge-offs would weigh on Merchants' profitability metrics, but its earnings profile remains strong, supported by a low cost/income ratio.

Statistics:

  • Tangible common equity/risk-weighted assets ratio: 9.2% (31 March 2025) vs. 7.8% (year-end 2023)
  • Commercial real estate concentration: 4.5x (31 March 2025) vs. 6.1x (previous period)
  • Nonperforming loans: 2.5% (31 March 2025) vs. 0.6% (year-end 2023)
  • Net charge-off levels: 30 basis points annualized (Q1 2025)
  • Cost/income ratio: low and supportive of Merchants' earnings profile
  • Uninsured deposits: roughly 24% of total deposits (31 March 2025)

Sources:

  • Moody's Ratings (Moody's)
  • Merchants Bancorp
  • Merchants Bank of Indiana
  • Banks published in November 2024, available at https://ratings.moodys.com/rmc-documents/432741
  • Rating Methodologies page on https://ratings.moodys.com