Merchants Bancorp's Rally Is Testing How Much Risk Investors Will Overlook

Merchants Bancorp’s second-quarter earnings more than doubled as credit costs fell sharply from last year’s elevated levels. The bank’s specialized model gives it more growth potential than a typical regional lender, but it also brings added credit and funding risks. Analysts still rate the stock a Buy overall, though the recent rally has pushed shares close to the average price target.

Merchants Bancorp is far from a typical community bank. It operates three distinct businesses: multifamily and healthcare mortgage banking; mortgage warehousing that funds other lenders' loans; and a traditional commercial and consumer banking unit. This diversified model, built since the company's 1990 founding as a mortgage banking company and its 2017 initial public offering, has made it one of the largest originators of government-sponsored multi-family and healthcare mortgages in the country. It also explains why its earnings can swing sharply from one quarter to the next as credit provisions and loan volumes shift.

The most recent numbers give an example. On July 28, Merchants Bancorp reported second-quarter net income of $78.3 million, more than double the $38 million earned a year earlier. Diluted earnings per share came in at $1.48 , up 147% from a year earlier and blowing past Wall Street's consensus estimate of $1.22 per share. Revenue of $182.2 million also topped the $179 million analysts had modeled. Net interest income rose to $136.5 million from $128.7 million a year earlier, a gain of about 6%.

Much of the surge in earnings came from its credit side, not just volume. Merchants slashed its provision for credit losses to $9.2 million in the quarter, 83% lower than a year earlier. The year-ago set-aside came as 2025 reflected weaker appraised values on multi-family properties and a borrower mortgage-fraud investigation that crushed second-quarter 2025 results.

Growth has also been a factor. Total assets hit a record $21.2 billion at quarter-end, up from $19.1 billion a year earlier and $20.3 billion in the first quarter of 2026. Deposits climbed to $14.25 billion from $12.7 billion a year ago. Tangible book value per share rose to $39.93 from $35.42 a year earlier, and credit metrics improved sequentially. Criticized loans, or those being watched for possible problems, fell to $444.7 million from $505.5 million, and nonperforming loans dropped to $205.6 million from $247.5 million in the first quarter.

Despite the current positive picture, Merchants has not avoided some turmoil. In the second quarter of 2025, Merchants Bancorp reported a sharp surge in credit provisions. That hit to earnings came as it recorded substantial loan charge-offs tied directly to mortgage fraud investigations involving specific borrowers. Adjustments were also heavily driven by estimated market value declines on multi-family real estate properties aft...