Merchants Bancorp (MBIN) Q1 2026 earnings review
Record Assets and Regulatory Wins Mask Underlying Credit Volatility
Merchants Bancorp hit record total assets ($20.3B) and tangible book value ($38.55/share) in 26Q1, supported by a remarkable turnaround in its funding profile and the removal of a regulatory MOU. However, earnings quality is heavily dependent on favorable fair value marks on servicing rights, which obscured a 48% sequential collapse in loan sale gains. More importantly, management's narrative of 'stabilizing' asset quality contradicts the data: while provisions for credit losses were slashed by 45%, actual non-performing loans jumped 25% sequentially. The bank remains highly profitable, but the divergence between underlying credit metrics and provision expenses requires close monitoring.
🐂 Bull Case
The deposit base has been fully transformed. Brokered deposits were halved in a single quarter, bringing core deposits to 93% of total funding. This structural shift drastically reduces liquidity risk and funding cost volatility.
The termination of the mid-2025 FDIC and IDFI Memorandum of Understanding (MOU) is a massive green flag, signaling regulatory confidence in management's internal controls and restoring strategic flexibility.
🐻 Bear Case
Management reduced credit provisions to a five-quarter low, yet delinquent loans rose 17% and non-performing loans spiked 25% sequentially. This disconnect suggests future quarters may require painful catch-up provisions if multi-family valuations don't recover.
Gain on sale of loans dropped nearly 50% QoQ as higher rates choked off permanent refinancing. Flat noninterest income was only salvaged by volatile, non-cash mark-to-market adjustments on servicing rights and derivatives.
⚖️ Verdict: ⚪
Neutral. The balance sheet derisking (core deposit growth, MOU termination) is commendable, but the contradictory asset quality signals and reliance on fair-value marks for revenue stability prevent a bullish rating.
Key Themes
Contradictory Narrative on Asset Quality
Reversing. Management explicitly stated that 'asset quality continued to stabilize,' citing a drop in criticized loans. However, the hard data contradicts this rosy picture: Non-Performing Loans (NPLs) surged 25% QoQ to $247.5M, and delinquent loans climbed 17%. Despite this deterioration, the company slashed its provision for credit losses by 45% QoQ to $15.3M. This divergence between rising bad loans and falling reserves is a major red flag.
Regulatory Cloud Lifted
The termination of the Memorandum of Understanding (MOU) with the FDIC and IDFI is a pivotal milestone. Issued in mid-2025, this regulatory constraint limited the bank's operational freedom. Its swift removal indicates that regulators are satisfied with the bank's risk management remediation, freeing up management to focus entirely on execution rather than compliance defense.
Funding Base De-Risked
Accelerating. The transformation of the liability side of the balance sheet is impressive. Brokered deposits plummeted by 50% sequentially to just $886.5M. Meanwhile, core deposits swelled by $781.4M in a single quarter, now comprising an exceptionally healthy 93% of total deposits. This insulates the bank's net interest margin from hot-money flight.
Macro Rate Pressures Crush Gain on Sale
Decelerating. Higher 10-year Treasury rates are choking the mortgage pipeline. Borrowers are delaying their transitions to permanent fixed-rate loans, causing Gain on Sale to collapse 48% QoQ to $13.5M. If rates remain 'higher for longer,' this historical profit engine will remain stalled.
Volatile Fair Value Marks Mask Fee Weakness
Noninterest income appeared stable QoQ ($46.6M vs $47.2M), but the composition shifted dramatically. The plunge in core loan sales was offset by an $8.9M positive fair value adjustment to mortgage servicing rights (MSRs) and a $2.7M mark-to-market gain on floor derivatives. These are non-cash, rate-driven adjustments that cannot be relied upon to fund operations indefinitely.
Multi-Family Concentration Risk Remains Acute
Stable. The multi-family portfolio continues to be the epicenter of credit stress. Four multi-family relationships accounted for the entirety of the 25% spike in NPLs this quarter. Furthermore, two loan relationships were responsible for nearly 75% of the quarter's $23.0M in net charge-offs. Concentration in this asset class requires outsized capital buffers.
Financial Innovation: Expanding Credit Default Swaps
Merchants is aggressively utilizing an innovative risk-transfer strategy for a bank of its size. The company maintains credit protection via Credit Default Swaps (CDS) covering $2.5 billion in loans (covering 13-15% of unpaid principal balances). Currently, 6% of criticized loans and 11% of delinquent loans are insulated by these swaps, structurally capping downside risk.
Other KPIs
Accelerating. Up 10% YoY and 3% QoQ. Driven by strong retained earnings and disciplined capital management. This represents an all-time record for the company and provides a robust floor for the stock's valuation.
Stable. NIM expanded slightly by 3 basis points QoQ and 3 basis points YoY. This resilience in a volatile rate environment is a direct result of swapping expensive brokered deposits for cheaper core deposits, effectively neutralizing the impact of lower asset yields.
Decelerating. Down from $35.0M in 25Q4. While warehouse loan balances actually grew, the segment suffered from a drop in origination volumes across the broader industry due to elevated mortgage rates.
Guidance
Management did not provide explicit numeric guidance for the upcoming quarter. However, they reiterated that previous additions of production staff are expected to elevate production, gain on sale, and related noninterest expenses in future quarters.
Key Questions
NPL vs Provision Disconnect
Non-performing loans jumped 25% sequentially, entirely driven by multi-family relationships, yet the provision for credit losses was cut by 45%. What specific collateral valuations or CDS coverages justify reducing reserves while delinquencies are accelerating?
Gain on Sale Recovery
With the 10-year Treasury remaining elevated and Gain on Sale dropping 48% sequentially, at what rate level do you model borrower fatigue breaking, forcing them to transition to permanent financing?
Post-MOU Capital Strategy
Now that the FDIC/IDFI MOU has been terminated, how does this change your approach to capital returns? Should we expect an acceleration in the share repurchase program or changes to the dividend policy?
Brokered Deposit Floor
You've successfully slashed brokered deposits by 50% in a single quarter. Is $886M the structural floor for brokered funding, or is the goal to eliminate them completely from the liability stack?