Merchants Bancorp (MBIN) Q3 2026 earnings review
Merchants Bancorp profit doubles on valuation gains, while problem loans worsen
Merchants Bancorp, an Indiana apartment and mortgage lender, reported a profit jump driven by accounting gains while its loan book shrank. Diluted profit per share more than doubled from a year ago to $2.06, and customer deposit growth let the bank pay down $1.3 billion of debt. However, president Michael J. Dunlap noted that servicing and derivative valuation gains lifted results, and by our math pre-tax profit excluding those $47 million marks fell 6% from last quarter.
| Total income, excluding valuation gains | $177.7M +4.7% from a year ago by our math |
|---|---|
| Reported diluted profit per share | $2.06 +112% from a year ago |
| Core customer deposits | $14.3B 95% of total deposits, up from 91% in Q2 |
| Substandard troubled loans | $278.7M +21% from last quarter by our math |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because strong deposit gathering and a rebound in net interest income offset a pause in loan growth. One caution: credit stress did not clear despite lower charge-offs, as $49 million of watch-list loans downgraded into the substandard tier and foreclosed properties rose.
The question now is whether those downgraded apartment loans and foreclosed properties can be resolved without new credit losses. Either collateral values hold up as borrowers refinance into permanent mortgages, or falling property appraisals force the bank to rebuild its loss reserves. The detailed delinquency and loan-modification tables in the upcoming third-quarter regulatory filing will show which way the book is moving.
🐂 Bull Case
Core Deposits Replaced Short-Term Wholesale Debt
Merchants Bancorp, an Indiana lender focused on apartment buildings and mortgage financing, has relied heavily on short-term wholesale debt and brokered deposits to fund its loans. Last quarter it carried $4.3 billion of borrowings, which created rollover risk if wholesale lenders pulled back. This quarter the bank brought in $1.4 billion of regular customer deposits, lifting core deposits by 11% from June to $14.3 billion.
- Core deposits: 95% of total deposits, up from 91% in June and 87% in December
- Brokered deposits: $723.5 million, down 44% from last quarter
- Total borrowings: $3.0 billion, down 30% from last quarter
- Unused borrowing lines: $6.3 billion, up from $5.5 billion in June
That influx allowed the bank to pay down $1.3 billion of borrowings and cut its brokered deposits nearly in half. Because customer checking accounts cost the bank 3.52% in interest while borrowings cost 4.07%, this shift lowers funding risk and supports interest profit.
What to watch: the mix of uninsured and custodial deposits in the third-quarter filing. If the new checking balances came from escrow accounts tied to its mortgage customers rather than sticky local depositors, they could leave when mortgage volume slows.
Net Interest Income and Multi-Family Sales Improved
Most of the lender's loans adjust their interest rates every three months, and high 10-year Treasury rates have kept apartment developers from refinancing bridge loans into permanent mortgages. Even so, net interest income — the profit from loan interest minus deposit interest — rose 5.6% from last quarter to $144.2 million, and profit from selling apartment loans jumped 58% from last quarter to $18.6 million.
Net interest margin, which measures the spread between what the bank earns on assets and pays on funding, ticked up 0.02 percentage points from June to 2.83% because average loan yields rose 0.14 points to 6.40%. That rebound shows borrowers are finally converting some apartment bridge loans into permanent agency mortgages despite current interest rates.
What to watch: fourth-quarter net interest margin if the Federal Reserve cuts short-term interest rates. Because loans reprice faster than checking accounts, lower policy rates would squeeze interest profit.
🐻 Bear Case
Paper Valuation Gains Drove the Earnings Beat
President and chief operating officer Michael J. Dunlap pointed to "higher servicing rights and derivative valuations that provide an earnings hedge to pressure on gain on sale revenue in the current interest rate environment". Servicing rights are contracts to collect mortgage payments for a fee, and floor derivatives are financial contracts that gain value when interest rates move.
Those two accounting adjustments added $47.3 million to noninterest income this quarter, up from $7.9 million in the second quarter. By our math, without those non-cash gains, total income grew 1.9% from last quarter instead of 23.4%, and pre-tax profit fell 6.2% because employee pay and benefits rose $5.7 million, or 2.8 percentage points of underlying income.
The company reported an efficiency ratio — operating expenses as a share of total income — of 35.4%, down from 40.2% last quarter. Without the valuation gains, that ratio was 44.8% by our math, because insurance premiums on loan pools also rose 69% from a year ago to $7.1 million.
What to watch: servicing rights and derivative fair-value adjustments in the fourth quarter. If long-term interest rates fall, these paper gains will turn into write-downs and pull reported profit back toward the underlying run rate.
Troubled Loans Moved Closer to Foreclosure
Chairman and chief executive Michael F. Petrie highlighted lower nonperforming loans — loans where borrowers have stopped paying — while noting the bank remains focused on "migration within criticized loan classifications". Criticized loans are the bank's watch list of troubled borrowers, split between an early-warning group called special mention and a worse group called substandard.
- Substandard loans: $278.7 million by our math, up $48.8 million or 21% from June
- Total criticized loans: $460.1 million, up 3.5% from June
- Foreclosed properties (other real estate owned): $91.7 million, up 27% from June
- Nonperforming loans: $180.3 million, down 12% from June
- Total delinquent loans: $215.6 million, up 3.6% from June
Nonperforming loans fell because of "loan payoffs and the transfer of one loan to other real estate owned" — meaning the bank took over the property. Meanwhile, early-warning loans did not heal; they downgraded into substandard, and credit default swaps cover only 6% of criticized loans.
What to watch: specific reserves on substandard loans, which stand at just $6.6 million on a $278.7 million book. If property appraisals fall when these loans resolve, credit loss provisions will rise.
Warehouse and Loan Balances Stopped Growing
In the first half of the year, Merchants grew by providing short-term warehouse lines of credit to mortgage lenders and holding more loans on its balance sheet. That engine paused in the third quarter as higher mortgage rates cooled lending activity.
Assets in the Mortgage Warehousing unit fell 6.5% from June to $8.09 billion, and mortgage warehouse fees dropped 8.6% to $1.7 million. Across the whole company, loans held for sale fell 12.4% to $4.04 billion and net loans receivable slipped 0.6% to $12.18 billion. Warehouse unit net income still rose 46% from June to $44.6 million, but only because the $19.1 million derivative valuation gain sat in that division.
What to watch: period-end warehouse assets and loans held for sale in the fourth quarter, which is seasonally slower for home buying. Another drop would reduce the earning assets that drive next year's interest income.
Risks This Quarter Didn't Answer
Three credit and concentration risks from the second quarter cannot be checked until the bank files its full quarterly report with regulators.
- Modified troubled loans: reached $87.2 million in the second quarter with $43.6 million re-defaulting in the first half; the release gives no third-quarter figure.
- Severely delinquent apartment loans: loans 90 or more days past due stood at $134.8 million in June; the release notes apartment delinquencies declined without giving the dollar amount.
- Troubled securitized bond: a $375.4 million apartment bond held to maturity had 37% of its underlying loans delinquent in June with zero loss reserve; its status lives in the filing footnotes.
👓 Other Themes
The Loan Exchange Acquisition Adds Costs First
On September 14, Merchants bought The Loan Exchange for $13.9 million, adding $11.1 million of goodwill. Dunlap said the deal "expands our single-family mortgage production capabilities and presence in jumbo lending", which are home loans too large for government agencies to buy. Because its single-family loan sales lost $403,000 this quarter, the company warned the purchase will bring "elevated operating expenses and may be dilutive to earnings" while it scales.
💲 Other KPIs
Tangible book value per share — what common shareholders would get if the bank liquidated its physical and financial assets at face value — rose 4.3% from last quarter and 14.7% from a year ago. It has reached a record high for 31 straight quarters because the bank retains most of its earnings.
The bank's core regulatory capital ratio — common equity as a share of risk-weighted assets — rebounded 0.6 percentage points from 9.3% in June, returning to its December 2025 level. High retained profit and a 2% drop in total assets rebuilt the buffer after two quarters of decline.
Fees from packaging low-income housing tax credits and managing debt funds fell 12.7% from the second quarter, though they remained 24.4% above a weak third quarter last year. For the first nine months of 2026, these fees are down 10% from a year ago.
🔮 Guidance
New. Merchants does not issue numerical revenue or profit targets, so its only forward commentary covers The Loan Exchange acquisition. The company expects the new unit to raise operating expenses and potentially reduce profit per share during its initial ramp-up before loan sales grow.
❓ Key Questions
Did loan modifications and re-defaults keep rising in Q3?
In the second quarter, Merchants modified $87.2 million of loans for struggling borrowers, and $43.6 million of previously modified loans defaulted again in the first half. Without the third-quarter filing tables, investors cannot tell if loan workouts are masking new delinquencies.
What is the status of the $375 million troubled bond?
At the end of June, 37% of the apartment loans backing a $375.4 million securitized bond held on the balance sheet were delinquent, yet the bank held no loss reserve against it. Any drop in collateral values could force an impairment charge.
How much will The Loan Exchange add to quarterly costs?
Management warned that the September acquisition will raise operating expenses and may weigh on earnings during its ramp-up, but gave no dollar range for the quarterly cost run rate or when the unit will break even.
Why has the bank paused share buybacks for two quarters?
Merchants announced a $100 million share repurchase plan in January, bought $3 million in the first quarter at an average price of $41.03, and bought nothing in the second or third quarters even as capital ratios rebuilt.