Merchants Bancorp

What they do

Merchants Bancorp operates through three segments: Multi-family Mortgage Banking (originating and servicing loans for affordable multi-family housing and healthcare facilities, plus LIHTC syndication), Mortgage Warehousing (warehouse financing, commercial loans, deposits), and Banking (portfolio lending, residential mortgage banking, agricultural, SBA, and community banking). The company funds fixed-rate government-underwritten loans under an originate-to-sell model, retaining adjustable-rate loans to manage interest rate risk.

Revenue drivers

• Multi-family Mortgage Banking — Originates and services FHA, Fannie Mae, Freddie Mac, and USDA loans for affordable housing and healthcare; generates noninterest income from gain on sale, servicing fees, and tax syndication fees. Origination volume was $6.5 billion in 2025 and $1.5 billion in Q2 2026.
• Mortgage Warehousing — Provides warehouse lines to mortgage lenders; funded $66.3 billion in warehouse loans during 2025, up 46% YoY, and $22.9 billion in Q2 2026, up 41% YoY; earns net interest income and fees.
• Banking — Portfolio lending for multi-family and healthcare loans, commercial, agricultural, SBA, and residential mortgage; retains adjustable-rate loans to generate net interest income; represents a growing source of deposits and fee income.
• LIHTC Syndications — Syndicates low-income housing tax credit and debt funds; raised $700.7 million in equity in 2025 across six funds, and $2.8 billion since inception in 2020, contributing to noninterest income.

Recent performance

In Q2 2026, net income was $78.3 million, up 106% YoY from $38.0 million, and diluted EPS was $1.48, up 147% YoY. Total assets reached $21.2 billion, a new high, with tangible book value per share of $39.93. Criticized loans fell to $444.7 million, down 12% from year-end 2025, and nonperforming loans declined 17% sequentially. Net interest margin was 2.81%, and the efficiency ratio improved to 40.20% from 43.16% a year ago. Provision for credit losses dropped 83% YoY to $9.2 million.

Strategy

The company focuses on an originate-to-sell model for government-underwritten loans while retaining adjustable-rate loans to reduce interest rate risk. It emphasizes growing core deposits, which now represent 91% of total deposits, and reducing reliance on brokered deposits. It uses securitizations (Freddie Mac Q-Series) and credit default swaps to manage capital and credit exposure. Management highlights synergies across segments and a diversified revenue stream to insulate against cyclical swings, while expanding LIHTC syndication and warehouse lending volume.

Risks

• Interest rate sensitivity — A rise in rates could reduce mortgage origination volumes and gain on sale revenue, though the company notes 97% of loans reprice within three months.
• Credit risk — Rising criticized and nonperforming loans could require higher provisions; criticized loans were $444.7 million at June 30, 2026, and the company used credit default swaps to mitigate risk-based capital requirements.
• Reduced mortgage production — Lower refinancing and origination volumes in a rising rate environment could hurt profitability, as the company depends on high volume and secondary market sales.
• Secondary market dependence — Profitability depends on active secondary markets and the ability to sell loans at a gain; disruptions or reduced demand could materially impact earnings.

Outlook

Management expects elevated 10-year Treasury rates to pressure near-term gain on sale, but loans in the pipeline are expected to convert to permanent loans over time. Higher rates support valuations on servicing rights and derivatives, providing an offset. The company sees continued strength in warehouse volume and multi-family origination, and expects improving credit trends to support earnings growth. Liquidity remains strong at $13.0 billion, with $5.5 billion unused borrowing capacity.