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

Key Points

• 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.

Few regional banks had a year as dramatic as Merchants Bancorp NASDAQ: MBIN and still managed to keep a Buy rating from analysts. The parent of Merchants Bank of Indiana has swung from a credit scare in mid-2025 to a shareholder investigation in the spring of 2026. Even so, the stock has kept climbing.

Investors interested in a growth bank stock that’s not a typical bank stock might find Merchants to be what they’re looking for.

Merchants’ Specialized Model Sets It Apart

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.

Lower Credit Costs Drive the Earnings Rebound

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.

Credit and Deposit Issues Have Fueled Turmoil

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 after the bank received new, lower appraisals. The stock declined nearly 9% on the news.

Further, law firms announced earlier this year that they were investigating the company after Merchants disclosed in this year’s first-quarter results that brokered deposits, a key funding source, had fallen nearly 50% year-over-year. They claim that this action came at odds with earlier management commentary about strong deposit growth. Shares fell more than 9% in late April to about $45 on the disclosure.

Shares Rally as Earnings Recover

That history, however, has barely slowed the stock price. Shares in Merchants are up more than 54% this year and 63.5% over the past 12 months.

Wall Street also expects diluted earnings of $5.58 per share for full-year 2026 and $5.99 for 2027. That would represent a sharp recovery from 2025, when full-year net income fell 32% to $218.8 million and diluted earnings per share dropped 40% to $3.78, largely because of the credit-provision spike.

Return on equity has softened as capital has grown faster than profit, but management has kept rewarding shareholders. The board raised the quarterly common dividend 10% to 11 cents per share in February 2026, marking the eighth consecutive year of dividend increases.

A $100 million share-repurchase authorization approved in January 2026 also gives management room to buy back up to roughly 6% of shares outstanding through the end of 2027.

Wall Street's take has been only slightly mixed, with an overall rating of Buy. Of the five analysts tracking the stock, three rate the company a Buy, one a Strong Buy, and one a Hold.

The consensus 12-month price target is near $51.50, while the stock has recently traded slightly above that level. The highest 12-month target is $64 per share, while the lowest is $42.

Recovery Potential Still Comes With Risks

Overall, this regional bank, which is much more than a regional bank, looks like a classic high-beta recovery story. Credit costs are normalizing, earnings are beating estimates, and the stock is responding.

A lingering risk is the unresolved shareholder investigations tied to deposit disclosures. Merchants also has a business model that leans heavily on specialized multi-family and mortgage-warehouse lending.

With that understood, investors could be in for a positive ride. But that does not necessarily mean the ride will be smooth.

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