Meridian Corporation: Still A Buy Despite A Downward Revision Of Earnings

Meridian Corporation (NASDAQ: MRBK) recently faced a downgrade in its Q2 2025 earnings outlook, driven by heightened credit provisions, declining non-interest income, and operational headwinds. While these challenges are legitimate concerns, the company's robust balance sheet, consistent dividend history, and strategic shifts suggest that the stock remains a compelling long-term opportunity. Let's dissect whether investors should view this as a buying opportunity or a red flag.

Dividend Sustainability: A Steady Beacon in Turbulent Waters

Meridian has maintained a $0.125 quarterly dividend per share since 2020, despite fluctuations in net income. This consistency is critical for income-focused investors. Even during Q1 2025's 57% sequential drop in earnings, the dividend remained unchanged, underscoring management's commitment to shareholder returns.

The dividend payout ratio (dividends/earnings) has varied due to earnings volatility but remains sustainable. In Q1 2025, the payout ratio was just 5.2% ($0.125 dividend vs. $2.4M net income), far below the 80-90% danger zone. Even in weaker quarters like Q1 2020, when earnings were $0.39 per share, the payout ratio peaked at 32%, a manageable level given Meridian's strong capital reserves (Common Equity Tier 1 ratio of 12.3% as of Q1 2025).

Current Headwinds: Navigating Credit Risks and Mortgage Challenges

The earnings downgrade stems from three key issues:

1. SBA Loan Troubles: A $7.1M rise in non-performing SBA loans, largely tied to 2020-2021 originations during rapid rate hikes, forced a $1.6M increase in credit loss provisions. These loans, however, are concentrated in a specific period, suggesting the problem could stabilize once these loans are resolved or restructured.

2. Mortgage Division Struggles: Mortgage banking income fell 38.5% in Q1 2025 due to lower origination volumes and reduced margins. While seasonal weakness plays a role, Meridian faces structural headwinds in the Delaware Valley and Maryland markets, where housing inventory is tight.

3. Operational Inefficiencies: The efficiency ratio worsened to 69.2%, up from 65.7% in Q4 2024, reflecting higher credit costs and lower non-interest income.

Underlying Strengths: Core Banking Resilience and Strategic Shifts

Despite these challenges, Meridian's core banking operations remain robust:

• Pre-Provision Net Revenue (PPNR) rose 30% year-over-year to $8.4M, highlighting strong core earnings.
• Net Interest Margin (NIM) improved to 3.46%, up 17 basis points sequentially, driven by lower funding costs.
• Commercial Loan Growth: A $49.5M increase in commercial loans (excluding leases) signals diversification into less volatile lending segments. Management's hiring of a senior commercial lender in 2024 could further boost this growth.

Future Growth Potential: A Path to Recovery

1. SBA Loan Remediation: While the remediation process is lengthy, management expects resolution by year-end 2025. Once completed, provisions could normalize, freeing up earnings.
2. Mortgage Division Turnaround: Seasonal improvements in home inventory and potential rate cuts could reignite mortgage demand. Meridian's reduced loan officer count (a cost-saving move) may limit origination capacity, but pricing power in a tighter housing market could offset this.
3. Deposit Growth: A $123M increase in deposits (including a $103M temporary inflow) strengthens liquidity, providing a buffer against credit losses.

Risks to Consider

• SBA Loan Resolution Delays: If non-performing loans grow further, provisions could climb, squeezing earnings.
• Economic Downturn: A recession could worsen credit quality and reduce loan demand across all segments.
• Mortgage Division Underperformance: If housing inventory remains constrained, mortgage income may stay depressed.

Investment Thesis: A Buy for Patient Investors

Meridian's stock trades at a 1.0x price-to-tangible-book ratio, well below its five-year average of 1.5x, suggesting it's undervalued. The dividend yield of 3.7% offers income stability, and the stock's 52-week low of $12.50 provides a margin of safety.

While near-term earnings pressure is real, the company's strong capitalization, improving NIM, and commercial loan growth position it to rebound once SBA loan issues are resolved. For investors with a 3-5 year horizon, this looks like a value play with upside potential if the housing market stabilizes and credit losses subside.

Final Take

Meridian Corporation is far from a perfect investment, but its disciplined dividend policy, core banking strengths, and manageable risks make it a hold-to-buy at current levels. While the near-term path is bumpy, the foundation for recovery is in place. Investors should watch for signs of stabilization in SBA loans and mortgage activity—both could be catalysts for a rebound.

Stay tuned for updates as Meridian navigates these headwinds.