Meridian Corporation: PPNR Growth and Strategic Loans Signal Long-Term Value Amid Near-Term Headwinds

Meridian Corporation (NASDAQ: MRBK) has emerged as a paradox in the regional banking sector: a company delivering robust operational growth while grappling with near-term credit challenges. Its first-quarter 2025 results highlight a 30.2% year-over-year surge in Pre-Provision Net Revenue (PPNR) to $8.4 million, underscoring its ability to generate core earnings despite a net income miss due to elevated credit provisions. This article argues that Meridian's improving PPNR and strategic loan growth position it as a compelling investment opportunity, even as it navigates short-term headwinds tied to its SBA loan portfolio.

The Case for PPNR: Operational Strength Amid Volatility

PPNR, a critical metric for banks, strips out credit loss provisions to focus on revenue generation efficiency. Meridian's 30% YoY PPNR growth reflects two key strengths:
1. Commercial Lending Momentum: Commercial loans grew 12% annualized to $49.5 million, fueled by strategic hires and demand for construction financing in regions like the Delaware Valley.
2. Balance Sheet Management: The net interest margin expanded to 3.46%, a 17-basis-point sequential improvement, signaling effective asset/liability management in a rising rate environment.

These gains are not mere accounting quirks. Meridian's deposit franchise—its lifeblood—grew by 6% to $1.2 billion, with non-interest-bearing deposits surging 34% quarter-over-quarter. This low-cost funding base, combined with a robust Community Bank Leverage Ratio (CBLR) of 9.3%, ensures financial flexibility. The dividend remains intact at $0.125 per share, yielding 3.59%, a testament to Meridian's capital resilience.

The SBA Loan Challenge: Temporary Drag or Structural Issue?

The elephant in the room is Meridian's $19.1 million in non-performing SBA loans, which drove a $1.6 million sequential increase in credit provisions to $5.2 million. However, three factors suggest this is a temporary issue, not a terminal flaw:

1. Guarantees and Loss Mitigation: 53% of non-performing SBA loans ($9.9 million) are guaranteed by the SBA, reducing Meridian's net exposure.
2. Rate-Driven Stress, Not Underwriting Failure: The bulk of delinquent loans originated in 2020–2021, when rates were near zero. Borrowers now face payments 500+ basis points higher, a macroeconomic shock, not poor credit decisions.
3. Progress in Remediation: While slow due to procedural requirements to preserve government guarantees, Meridian is actively working to resolve these loans.

Critically, the SBA loan portfolio's margin on sales improved to 8.7% in Q1, up from 7.5% in Q4, signaling operational improvements. Management has also noted that mortgage division headwinds—responsible for a $2.1 million sequential income drop—are temporary, with Q2 home inventory increases expected to stabilize performance.

Valuation: A Discounted Multiple for a Growing Bank

Meridian's stock trades at a 5.04% discount to its $16 price target, even after a 22.9% YTD gain. This undervaluation persists despite its PPNR growth and deposit franchise strength. Key valuation metrics to consider:

• PPNR Multiple: Meridian's PPNR growth outpaces peers, yet its stock trades at a 20% discount to regional bank averages.
• Asset Quality Improving: The NPL ratio, while elevated at 2.49%, is manageable and likely to stabilize as SBA loans are resolved.
• Deposit Growth: A $103 million temporary customer deposit boosted assets to $2.5 billion, but recurring deposit growth (up 2.1% in loans) suggests organic strength.

Investment Thesis: Buy on Weakness

The bears are right to flag Meridian's near-term earnings pressure. However, the bulls have stronger long-term arguments:
- PPNR as a Leading Indicator: The 30% YoY PPNR growth suggests Meridian can weather credit storms and expand profitably once provisions normalize.
- Deposit Franchise as an Asset: Low-cost deposits and a strong CBLR position Meridian to capitalize on rising rates and market consolidation.
- Undervalued on a Turnaround Basis: At current levels, the stock reflects peak credit concerns. A resolution of SBA loans could unlock upside.

Conclusion

Meridian Corporation's Q1 results are a mixed bag, but the underlying story is one of operational resilience. The SBA loan provisions are a speed bump, not a roadblock, given the guarantees, remediation progress, and macro-driven nature of the stress. With a 3.59% dividend yield and a stock price that's already priced in pessimism, Meridian presents a compelling risk/reward profile. Investors should consider adding positions on dips below $16, with a long-term horizon focused on PPNR growth and deposit-driven profitability.

Disclosures: This analysis is for informational purposes only and does not constitute investment advice.