Credit starts to heal as mortgage warehousing surges
- Asset quality improved in the second quarter of 2026, with nonperforming loans falling to 1.67 percent.
- The provision for credit losses dropped 83 percent from a year ago.
- Mortgage Warehousing remains the growth engine, with first half funded volume up 51 percent.
- The bank still took 16.5 million dollars in second quarter charge-offs, showing some loan pain remains.
- Finn gives the bank a low financial health score, meaning the stock still depends on a cleaner loan book.
The loan cleanup shows real progress
Merchants Bancorp had a strong second quarter in 2026. The aggressive cleanup of bad loans started to show real results. Nonperforming loans, meaning loans not paying as agreed, fell to 1.67 percent of total loans from 2.16 percent in the prior quarter. This allowed the bank to slash its provision for credit losses by 83 percent compared to a year ago.
The best part of the business is still Mortgage Warehousing. This unit gives short term funding to mortgage lenders until those loans are sold to investors. Funded volume grew 51 percent year over year in the first half of 2026, which was more than double the 24 percent industry average.
The problem is that the cleanup is not completely finished. The bank still recorded 16.5 million dollars in charge-offs during the second quarter. Most of those losses came from multi-family loans, meaning some residual pain from the recent cycle remains in the portfolio.
The stock case is looking brighter. Bulls can point to the massive drop in loan loss provisions and the huge market share gains in warehousing. Bears can point to the remaining charge-offs and ask if the multi-family loan problems are truly over.
A mortgage bank inside a bank
Merchants makes money in two main ways. First, it originates fixed-rate loans that often meet government program standards, then sells many of them. That creates gain-on-sale income and servicing fees.
Second, it keeps adjustable-rate loans on its balance sheet. Those loans produce net interest income, which is the spread between what borrowers pay and what the bank pays for deposits and borrowings.
The funding base comes from mortgage custodial deposits, municipal deposits, retail and commercial deposits, brokered deposits, and short term borrowings. That gives Merchants several funding pipes, but it also means higher rates and deposit pressure can hit margins.
The model works best when mortgage activity is healthy, loan sales stay open, and credit losses stay low. It breaks when property values fall, borrowers cannot refinance, or warehouse customers pull back.
Where the loans come from
Mortgage Warehousing
This unit funds mortgage lenders for short periods, usually until loans are sold to investors. It was the standout in the first half of 2026, with funded volume far ahead of the industry.
Multi-family Mortgage Banking
This business finances and services multi-family housing and healthcare facilities, often through government-backed channels. It also includes low-income housing tax credit syndication and debt funds.
Loan servicing
Servicing means Merchants collects payments and handles loan administration after loans are made. Fees can be steady, but the segment result can be hurt by changes in the value of servicing rights.
Banking portfolio loans
The Banking segment holds loans such as multi-family, healthcare, residential mortgage, agricultural, and SBA loans. This is the largest asset base, but it is also where recent credit costs have been concentrated.
Community banking deposits and services
Merchants gathers deposits from retail, commercial, municipal, mortgage, and brokered channels. Deposits help fund lending, but their cost can rise when rates stay high.
Banking is biggest, warehousing is fastest
Segment mix uses year-end 2025 segment assets from the 2025 Form 10-K: Banking at 11.3 billion dollars, Mortgage Warehousing at 7.3 billion dollars, and Multi-family Mortgage Banking at 526.4 million dollars. The mix is asset-based, not revenue-based, so it shows balance sheet weight rather than fee mix.
What could still go wrong
Nonperforming loans stay in focus
High impact · Medium oddsThe NPL ratio dropped to 1.67 percent at June 30, 2026. That is a big improvement from 2.16 percent in the prior quarter, but investors want to see it stay low to confirm the worst is over.
Charge-offs keep draining capital
High impact · Medium oddsMerchants charged off 16.5 million dollars in the second quarter of 2026. If this pace continues, the credit cleanup could keep hurting Banking segment profit.
Fraud investigation costs more
High impact · Low oddsManagement previously tied part of the credit stress to an investigation of borrowers involved in suspected mortgage fraud. The key unknown is how much exposure remains and whether more losses appear.
Mortgage warehouse growth slows
Medium impact · Medium oddsMortgage Warehousing is the main growth engine. If mortgage volumes weaken or competitors price more aggressively, the segment could lose momentum after a massive 51 percent volume gain in the first half of 2026.
Rates and funding costs squeeze spreads
Medium impact · Medium oddsMerchants funds loans with a mix of deposits and short term borrowings. If funding costs rise faster than loan yields, net interest income can fall even if loan balances grow.
In one breath
What does Merchants Bancorp do?
Merchants Bancorp is a bank holding company based in Carmel, Indiana. It focuses on mortgage warehousing, multi-family and healthcare lending, mortgage banking, SBA lending, and community banking.
What is the biggest risk for MBIN stock?
The biggest risk is credit quality. While nonperforming loans fell to 1.67 percent of total loans in the second quarter of 2026, the bank is still taking material charge-offs in multi-family loans.
Why is Mortgage Warehousing important?
It is the fastest growing segment and a major profit driver. In the first half of 2026, funded volume grew 51 percent year over year, showing continued market share gains.
Sources and research notes
This page combines Finn's company research with public filings and other cited materials. The thesis is reviewed when material company information changes; Finn Scores use the latest available scoring data.
- Thesis reviewed
- August 16, 2026
- Score data
- September 6, 2026
- Reviewed by
- Shivam Bharuka
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