Is Merchants Bancorp's Q2 Earnings Disappointment a Buying Opportunity?

Merchants Bancorp (NASDAQ: MBIN) has stumbled in Q2 2025, reporting a 60% drop in earnings per share and a 50% decline in net income year-over-year. The culprit? A perfect storm of mortgage fraud investigations, multi-family property value declines, and a $43.1 million spike in credit loss provisions. While the numbers are grim, a closer look reveals a company with a resilient business model, improving asset quality, and a tangible book value per share that's hit a record $35.42—up 13% from 2024. For contrarian value investors, this raises a critical question: Is the stock's 24.8% year-over-year decline a mispricing opportunity, or a warning sign to avoid?

Short-Term Pain vs. Long-Term Resilience

The Q2 blowout was no surprise. The company has been grappling with a multi-family loan portfolio under pressure from falling property values and a high-profile fraud investigation. Loan charge-offs of $46.1 million and a 54% surge in noninterest expenses to $77.3 million painted a bleak picture. Yet, amid the noise, key metrics tell a different story. Total delinquencies fell 17% quarter-over-quarter, and special mention loans dropped 58%. The company's tangible book value, a critical proxy for intrinsic value, continues to climb, now trading at a 0.97 price-to-book ratio—below sector averages.

The contrast between short-term pain and long-term durability is striking. While the earnings shortfall was severe, the company's asset base has grown to $19.1 billion, and liquidity remains robust, with $647.2 million in cash and $5.0 billion in unused borrowing capacity. This isn't the story of a dying bank—it's the story of a lender navigating a cyclical correction while maintaining a strong balance sheet.

Valuation Metrics Suggest a Discount

Merchants Bancorp's valuation multiples are compelling. At a P/E of 6.38, it trades at less than half the sector average. For context, peers like Valley National Bancorp (VLY) and Webster Financial (WBS) trade at 13.10 and 10.73, respectively. The stock's price-to-book ratio of 0.97 implies the market is valuing the company below its net asset value—a classic contrarian signal.

But value investing isn't just about cheap numbers—it's about sustainable value. Merchants has shown resilience in noninterest income, which rose 61% year-over-year to $50.5 million, driven by gains on loan sales and asset management fees. This diversification is a positive sign, as it reduces reliance on volatile net interest income.

Risks and Realities

Critics will point to the company's bearish analyst sentiment, a Zacks Rank of #3 (Hold), and a history of earnings misses. Q1 2025 saw a -25.6% earnings surprise, and the company has beaten estimates only once in the past four quarters. The mortgage fraud investigation, which has also impacted rivals like Customers Bancorp (CUBI), remains a wildcard.

However, these risks are already priced into the stock. The key question is whether management can stabilize the credit portfolio and return to growth. Chairman Michael Petrie's emphasis on “proactive credit risk management” and the company's 2% year-over-year asset growth suggest a path to recovery.

Strategic Entry Point for Long-Term Investors?

For value investors with a multi-year horizon, MBIN's current valuation is tempting. The company's strong liquidity, improving asset quality, and low valuation multiples create a margin of safety. However, the path to recovery isn't guaranteed.

1. Catalysts for Re-rating: A resolution to the mortgage fraud investigation, a stabilization of multi-family property values, or a successful Q-Series securitization could unlock value. The company's recent $373.3 million securitization in Q2 2025 is a positive step.
2. Dividend and Buyback Potential: With a P/B of 0.97, the company has room to return capital to shareholders through dividends or buybacks, which could further enhance value.
3. Sector Rotation: A broader rebound in regional banks, driven by tighter credit spreads or regulatory relief, could lift MBIN's shares.

Final Verdict: Proceed with Caution, But Don't Overlook

Merchants Bancorp is a textbook example of a stock caught in a cyclical storm. Its Q2 earnings miss is real, but so is its long-term value. For investors willing to tolerate volatility, the current discount offers a compelling entry point—if the company can navigate its credit challenges and return to growth.

Investment Advice:
- Buy for Long-Term Holders: Investors with a 3–5 year time horizon and a stomach for volatility should consider a small position. The valuation is attractive, and the company's fundamentals suggest a path to recovery.
- Wait for Clarity: Those who prefer lower risk should wait for Q3 results, where the impact of the fraud investigation and credit losses may become clearer.
- Avoid as a Core Holding: MBIN is speculative, not a staple. Use a strict stop-loss and reassess if management fails to deliver on its credit risk mitigation plans.

In a market where sentiment swings wildly, Merchants Bancorp's Q2 disappointment may be the best thing that's happened to its stock in years. For contrarians, the question isn't whether it's a buy—it's whether it's a good buy. The answer, for now, leans toward yes.