Merchants Bancorp: A High-Risk Bet Amid Eroding Margins and Credit Vulnerabilities

The allure of banking stocks often lies in their perceived stability, yet Merchants Bancorp (MBIN) presents a paradox. While its tangible book value per share has risen to $36.31 in Q3 2025, and unused borrowing capacity remains robust at 30% of total assets according to the latest report, the company's operational performance reveals troubling trends. For long-term investors, the combination of deteriorating net interest margins, volatile earnings, and fragile capital adequacy ratios suggests a high-risk proposition.

Eroding Net Interest Margins: A Structural Weakness

Merchants Bancorp's net interest margin (NIM) has contracted sharply in recent quarters, reflecting broader challenges in asset quality and pricing power. In Q3 2025, NIM stood at 2.82%, down 1 basis point from Q2 2025 and a stark 17 basis points below the 2.99% recorded in Q3 2024. This decline, while modest in absolute terms, underscores a structural shift. The company attributes the pressure to credit provisions, particularly in multi-family and healthcare loan portfolios, but the persistence of such trends could erode profitability.

The NIM contraction contrasts with the company's earlier resilience. In Q4 2024, NIM remained stable at 2.99%, supporting a 8% increase in net interest income. However, the subsequent deterioration in Q3 2025-amid rising credit losses and a 16-basis-point drop in Q2 2025-highlights vulnerability to macroeconomic shocks. For a regional bank reliant on interest income, such volatility is a red flag.

Earnings Volatility: A Tale of Two Quarters

Merchants Bancorp's earnings trajectory has been anything but linear. In Q3 2025, net income surged 44% from Q2 2025 to $54.7 million, yet this masked a 11% decline compared to Q3 2024. The second quarter of 2025 was particularly dire: net income plummeted 50% year-on-year to $38.0 million, driven by a $29.2 million provision for credit losses. These swings reflect a lack of earnings consistency, a critical concern for long-term investors seeking predictable cash flows.

The company's 2024 performance-a record $320.4 million in annual net income-provided a false sense of security. Yet the Q2 2025 correction, linked to mortgage fraud investigations and declining multi-family property values, demonstrates how quickly credit risks can materialize. Even as tangible book value per share rose 12% year-on-year in Q3 2025, the earnings volatility suggests a fragile earnings model.

### Capital Adequacy: A Shield, Not a Guarantee
Merchants Bancorp's Tier 1 capital ratio improved to 11.8% in Q3 2025, up from 11.5% in Q2 and 10.5% in Q3 2024. This progress, coupled with unused borrowing capacity of $5.9 billion, appears reassuring. However, the company's reliance on risk-mitigation tools-such as credit default swaps on a $557.1 million healthcare mortgage loan pool-reveals a defensive posture.

While capital ratios remain above regulatory thresholds, they mask underlying vulnerabilities. The 2025 credit losses and the need for active capital management (e.g., credit risk transfers) suggest that the company's capital position is contingent on continued asset quality. A further deterioration in loan portfolios, particularly in multi-family or healthcare sectors, could strain these buffers.

Macroeconomic Headwinds and Risk-Adjusted Returns

The broader macroeconomic environment compounds these challenges. Rising interest rates, which once bolstered net interest income, now threaten to exacerbate credit risks as borrowers face higher servicing costs. Merchants Bancorp's exposure to commercial real estate-particularly multi-family properties-leaves it vulnerable to a downturn in asset values.

For long-term investors, the key question is whether the company's current valuation, which appears attractive on metrics like tangible book value, justifies the operational risks. The answer lies in the interplay between capital resilience and earnings predictability. While MBIN's capital position remains robust, the combination of declining NIMs, volatile earnings, and sector-specific credit risks suggests that risk-adjusted returns are unlikely to meet expectations in a prolonged period of economic uncertainty.

Conclusion: A High-Risk Proposition

Merchants Bancorp's financial metrics tell a story of mixed signals. On one hand, its capital position and asset growth appear solid. On the other, the erosion of net interest margins, earnings volatility, and credit vulnerabilities paint a picture of a company struggling to adapt to a shifting landscape. For investors with a high tolerance for risk, MBIN may offer compelling upside if its credit challenges abate. However, for those seeking stability, the company's operational fragility-amid a macroeconomic backdrop that amplifies such weaknesses-makes it a perilous bet.