Is Merchants Bancorp (MBIN) a Buy After Q2 2025 Earnings? A Deep Dive into Metrics, Risks, and Opportunities

Merchants Bancorp (MBIN) has long positioned itself as a strategic player in the government-backed lending niche, leveraging its expertise in multi-family mortgage loans and warehouse lending. The company's Q2 2025 earnings report, however, reveals a complex picture: a sharp decline in net income, rising credit losses, and a volatile macroeconomic backdrop. Yet, beneath the headline numbers, MBIN's management has demonstrated disciplined risk management, liquidity fortification, and a clear commitment to navigating its high-margin niche through securitization and credit protection. For investors, the question is whether these strengths outweigh the near-term headwinds—and whether MBIN remains a compelling long-term bet.

The Earnings Dilemma: A 50% Drop in Net Income

Merchants Bancorp's Q2 net income plummeted to $38.0 million, or $0.60 per share, a 50% decline from Q2 2024 and 35% lower than Q1 2025. The culprit? A staggering $43.1 million spike in the provision for credit losses, driven by two key factors:
1. Multi-family property value declines: New appraisals revealed significant devaluations in the company's portfolio, a vulnerability in a sector where asset prices are closely tied to regional real estate dynamics.
2. Mortgage fraud investigations: The company identified 14 borrowers involved in suspected fraud, leading to $46.1 million in charge-offs with no recoveries. This is a rare but critical risk in government-backed lending, where third-party appraisals and borrower diligence are paramount.

While these losses are severe, they were partially offset by a 61% increase in noninterest income ($19.1 million), fueled by gains on loan sales ($23.3 million) and asset management fees ($9.7 million). This highlights MBIN's ability to monetize its government-backed lending niche through secondary market activity—a high-margin avenue that could stabilize earnings over time.

Strategic Risk-Adjusted Growth: A Niche Worth Defending

Merchants Bancorp's core strength lies in its government-backed lending expertise, particularly its Freddie Mac-sponsored Q-Series securitizations. The June 2025 $373.3 million securitization of 18 multi-family loans underscores the company's ability to offload risk while retaining a portion of the upside. Such transactions not only improve liquidity but also reduce exposure to asset-specific risks, a critical advantage in a volatile market.

Moreover, MBIN has implemented credit protection arrangements totaling $3.7 billion in loans, with coverage of 13–14% of unpaid principal balances. These tools, including credit-linked notes and default swaps, act as a buffer against further losses. As of June 30, 2025, $2.8 billion in loans were protected, a testament to the company's proactive risk mitigation.

Liquidity and Balance Sheet Resilience

MBIN's balance sheet remains a cornerstone of its strategy. Total assets grew to $19.1 billion, driven by mortgage warehouse portfolios, while core deposits surged to 90% of total deposits ($11.4 billion). This shift away from brokered deposits (down 50% YoY) reduces funding costs and enhances stability.

Liquidity is another strength. The company holds $5.0 billion in unused borrowing capacity with the Federal Home Loan Bank and Federal Reserve, equivalent to 26% of total assets. Combined with $11.9 billion in liquid assets (cash, short-term investments), this provides ample flexibility to weather further credit stress or pursue strategic opportunities.

Risks and Opportunities in a High-Margin Niche

The risks are clear:
- Credit risk: Multi-family property values and mortgage fraud remain tail risks, particularly in a tightening credit environment.
- Margin compression: The net interest margin (NIM) fell to 2.83%, pressured by a shift toward lower-margin loans held for sale.
- Regulatory scrutiny: Ongoing investigations into fraud could trigger operational costs or reputational damage.

However, the opportunities are equally compelling:
- Government-backed lending tailwinds: The Q-Series platform and Freddie Mac's support offer a stable pipeline for high-quality loans.
- Tangible book value growth: At $35.42 per share, tangible book value is up 13% YoY, signaling capital preservation and long-term value creation.
- Fee income potential: The 61% surge in noninterest income suggests MBIN can leverage its niche to diversify revenue streams.

Investment Thesis: A Hold with Caution

The Zacks Rank of #3 (Hold) and consensus EPS estimates of $4.49 for FY2025 suggest modest growth expectations. While MBIN's risk-adjusted strategy is sound, the near-term outlook hinges on three factors:
1. Resolution of mortgage fraud investigations: A successful mitigation of losses could restore confidence in the loan portfolio.
2. Stabilization of multi-family valuations: A rebound in property prices or improved underwriting standards could reduce future provisions.
3. Execution of securitization plans: Continued access to government-backed channels will determine MBIN's ability to scale its high-margin niche.

For investors, the key is to balance MBIN's strategic advantages (liquidity, credit protection, and fee income) with its current vulnerabilities (credit losses and margin pressures). While the stock is not a screaming buy at the moment, it could offer compelling upside if the company navigates its challenges effectively and capitalizes on its government-backed lending expertise.

Final Verdict: A cautious Hold is warranted. Investors with a medium-term horizon and a tolerance for volatility might consider adding MBIN on a pullback, but only after monitoring the resolution of credit risks and the trajectory of noninterest income. For now, MBIN remains a niche player in a high-margin space, but one that demands close attention to its risk management playbook.