Executive Summary / Key Takeaways

• LINKBANCORP (LNKB) is a community-focused bank executing a growth strategy through relationship building and targeted lending to small businesses and non-profits, recently refining its footprint via a strategic branch divestiture.
• The company reported record net income of $15.3 million in Q1 2025, significantly boosted by an $11.1 million gain on the sale of its New Jersey operations, highlighting management's willingness to optimize its geographic presence.
• Underlying banking operations showed modest net interest income growth year-over-year, driven by loan portfolio expansion, though partially offset by increased funding costs and a slight decrease in net interest margin.
• While demonstrating solid capital levels well above regulatory minimums, LNKB faces competitive pressures from larger, more technologically advanced peers and must continue to invest in operational efficiency to maintain its market position.
• Key factors for investors to monitor include the company's ability to sustain loan growth in its core markets, manage credit quality amidst rising non-performing loans, control operating expenses post-restructuring, and effectively leverage its community-centric model against digital competitors.

A Foundation Built on Relationships and Strategic Growth

LINKBANCORP, Inc. was founded in 2018 with a clear vision: to build a community bank focused on positively impacting lives through strong relationships. This mission has guided its journey, starting with the foundational acquisition of Stonebridge Bank, which became the initial LINKBANK. The strategy quickly evolved to include growth through strategic mergers, notably the integration of The Gratz Bank in 2021 and Partners Bancorp in 2023. These mergers significantly expanded LINKBANCORP's operational footprint across Pennsylvania and into key markets in Maryland, Delaware, and Virginia, diversifying its geographic presence and customer base.

The core of LINKBANCORP's business lies in traditional community banking services – lending, deposit gathering, and cash management – tailored for retail customers, small businesses, and nonprofit organizations. The bank emphasizes building deep relationships, a strategic pillar intended to foster loyalty and differentiate itself in competitive markets. Lending activities are specifically targeted towards small businesses, aiming to build a diverse portfolio across various business segments and collateral types.

This strategic evolution recently included a significant divestiture. On March 31, 2025, LINKBANK completed the sale of its New Jersey operations, including three branch locations, associated loans, and deposits, to American Heritage Federal Credit Union. This move, which generated a substantial gain, signals a strategic refinement of the company's market focus, concentrating resources on its established and growing presence in Pennsylvania, Maryland, Delaware, and Virginia.

The Competitive Arena: Local Strength vs. Scale and Efficiency

LINKBANCORP operates within a dynamic and competitive banking landscape. Its primary rivals include other regional banks with overlapping geographic footprints and similar service offerings, as well as larger national institutions and increasingly, fintech companies offering digital alternatives. Key publicly traded competitors include Customers Bancorp (CUBI), National Bank Holdings Corporation (NBHC), Citizens Financial Group (CFG), and Ally Financial (ALLY).

Compared to these peers, LNKB holds a smaller market share, estimated to be in the range of 0.05-0.1% of the U.S. regional banking market. Its growth trajectory, estimated at 2-5% annually, has lagged behind some competitors like CUBI (10-15% growth) and NBHC (8-12% growth), suggesting challenges in scaling at the same pace.

LINKBANCORP's competitive advantages are primarily rooted in its community-focused model and local branch network. This hyper-local presence fosters stronger customer relationships, potentially leading to higher customer loyalty and repeat business, which can translate into more stable deposit bases and lending opportunities. This local strength can be particularly effective in niche markets within its operating regions, potentially allowing LNKB to capture market share by exploiting regional vulnerabilities of larger, less localized institutions. Furthermore, as a regulated bank, LNKB benefits from the significant regulatory barriers to entry that protect established institutions from new, non-bank competitors.

However, LNKB faces notable competitive disadvantages, particularly concerning scale and technological capabilities relative to larger peers. While the company offers standard digital banking services, including mobile banking and online platforms, there is no detailed information available regarding any specific, differentiated core technology that provides a quantifiable advantage over alternatives. The strategic intent behind its digital offerings appears to be focused on providing expected modern conveniences and supporting operational efficiency, rather than leveraging proprietary technology as a primary competitive moat. Comparative analysis suggests that larger competitors like CUBI and NBHC demonstrate greater efficiency in capital utilization and operational processes, potentially linked to more advanced technology integration. This can translate into lower operating costs per loan or faster service delivery (e.g., loan processing or transaction speeds), areas where LNKB may lag, potentially incurring 10-20% higher costs or slower processing times compared to the most efficient peers.

The competitive landscape is also being reshaped by indirect competitors, particularly fintech firms offering digital-first banking solutions. These players often boast lower cost structures and faster digital processing, pressuring traditional banks like LNKB to invest heavily in technology to remain competitive. While LNKB's physical network offers a counterpoint to purely digital models, the need for ongoing technological investment could impact profitability margins.

In summary, LNKB's competitive positioning is characterized by leveraging its community banking model and local presence as key differentiators, particularly in deposit gathering and relationship-based lending. However, it must contend with the scale and efficiency advantages of larger regional banks and the technological disruption posed by fintech, necessitating continued strategic investment in its operational capabilities and digital offerings to defend and grow its market share.

Financial Performance: A Quarter Marked by Strategic Gain

LINKBANCORP's financial performance in the first quarter of 2025 demonstrated a significant surge in profitability, primarily driven by a strategic asset sale. Net income reached a record $15.3 million, or $0.41 per diluted share, a substantial increase from $5.7 million, or $0.15 per diluted share, in the first quarter of 2024, and $7.6 million, or $0.20 per diluted share, in the linked fourth quarter of 2024.

The primary driver of this increase was a gain of $11.1 million recorded within noninterest income related to the sale of the New Jersey solutions centers. This one-time event significantly boosted the top and bottom lines for the quarter.

Looking beyond this gain, the underlying net interest income before the provision for credit losses showed modest growth, increasing by $947 thousand, or 3.8%, to $25.8 million for the three months ended March 31, 2025, compared to $24.9 million for the same period in 2024. This growth was primarily attributable to a higher average balance of interest-earning assets, which increased by $175 million to $2.66 billion, largely driven by a $109.3 million increase in the average balance of the loan portfolio, reaching $2.35 billion. However, the net interest margin slightly compressed, decreasing by nine basis points year-over-year to 3.94%, reflecting the challenging interest rate environment and increased cost of funds. The average yield on interest-earning assets decreased by 16 basis points to 6.14%, influenced by lower amortization of net loan discounts from purchase accounting adjustments compared to the prior year.

Interest expense increased by $420 thousand, or 3.0%, to $14.3 million, primarily due to a $122.7 million increase in the average balance of interest-bearing liabilities, which reached $1.88 billion. While the average rate paid on interest-bearing liabilities decreased by nine basis points to 3.08%, the higher volume drove the overall expense increase. The impact of the interest rate swap reduced interest expense by $198 thousand in Q1 2025, compared to $386 thousand in Q1 2024, also contributing to the higher year-over-year expense.

Non-interest expense saw a modest increase of $408 thousand, or 2.1%, totaling $19.7 million. Management noted that this figure included two specific one-time accruals: $490 thousand within salaries and employee benefits related to a bonus accrual for the New Jersey branch sale and $381 thousand within other expenses for costs associated with the Board of Directors restructuring. Excluding these items, underlying operating expenses would have shown a different trend. Management anticipates that total non-interest expenses in future quarters will be incurred at a lower rate than in Q1 2025 due to the non-recurring nature of these items.

The provision for credit losses increased to $228 thousand in Q1 2025 from $40 thousand in Q1 2024, primarily attributed to an increase in forecasted losses on loans. Income tax expense rose to $3.9 million, reflecting the higher pre-tax income, resulting in an effective tax rate of 20.1%. The effective tax rate is now influenced by state corporate income taxes from recent mergers, occasionally exceeding the federal statutory rate of 21%.

Balance Sheet Dynamics and Credit Quality Considerations

As of March 31, 2025, total assets stood at $2.86 billion, a slight decrease of $17.3 million from $2.88 billion at December 31, 2024. This decrease was primarily a result of the New Jersey branch sale, which removed $94.1 million in assets held for sale from the balance sheet. This was partially offset by increases in cash and cash equivalents ($54.1 million to $220.2 million), loans held for investment ($18.2 million to $2.27 billion), and securities available-for-sale ($13.6 million to $159.2 million).

The loan portfolio composition remains diverse, with significant concentrations in commercial real estate (owner-occupied and non-owner occupied totaling over $1.1 billion) and residential real estate ($458.3 million). Commercial and industrial loans represent a substantial portion as well ($257.3 million). While total gross loans increased by $18.3 million in the quarter, construction loans decreased by $16.2 million, while commercial real estate and commercial loans saw increases.

Credit quality metrics warrant close monitoring. Non-performing loans increased to $26.0 million, or 1.15% of total gross loans, at March 31, 2025, up from $17.2 million, or 0.76%, at December 31, 2024. This increase was primarily driven by three specific loans totaling $8.8 million being placed on non-accrual status during the quarter. The allowance for credit losses for loans increased slightly to $26.6 million, representing 1.17% of total gross loans, consistent with the prior quarter's percentage. Management is in the process of obtaining updated appraisals for the collateral on the newly non-accrual loans.

The company has a concentration in commercial real estate (CRE) lending, common among community banks. Non-owner-occupied CRE loans (including construction, land, and land development) represented 331.85% of total risk-based capital at March 31, 2025. While this ratio decreased from 365.65% at year-end 2024 due to the New Jersey sale, it remains above supervisory thresholds. Management employs heightened risk management procedures, including stress testing, for its CRE portfolio, but regulatory guidance may still require the company to maintain higher capital levels.

Deposits grew by $73.1 million, or 3.1%, to $2.43 billion. This growth was seen across interest-bearing demand, money market/savings, and time deposits, partially offset by a decrease in noninterest-bearing demand deposits. Uninsured deposits were estimated at $840.6 million, or 34.5% of total deposits, at quarter-end, though a portion of these are municipal deposits fully secured by pledged securities.

Liquidity remains robust, with significant available borrowing capacity. At March 31, 2025, the company had approximately $735.7 million in remaining available capacity with the FHLB, $77 million in correspondent bank lines of credit, and $23.9 million at the Federal Reserve Discount Window. Long-term FHLB borrowings stood at $40 million, while short-term borrowings decreased to zero.

Regulatory capital ratios are strong, with the Bank exceeding the requirements to be considered "well capitalized" under Basel III rules. The company has opted to phase in the effects of CECL on its regulatory capital.

Outlook and Key Risks

While LINKBANCORP does not provide explicit forward-looking financial guidance beyond commentary on expected non-interest expenses, the Q1 results and management's commentary offer some insight into the near-term outlook. The significant gain from the New Jersey branch sale is a one-time event that boosted Q1 profitability, and future quarters will not benefit from this. However, the underlying net interest income growth, albeit modest, suggests continued expansion of the core banking business. Management's expectation for lower non-interest expenses in future quarters, following the Q1 one-time accruals, could provide some support to profitability going forward.

Several risks and challenges could impact the company's performance and the investment thesis:

• Credit Risk: The increase in non-performing loans, particularly in commercial real estate and commercial & industrial segments, warrants close attention. Deterioration in economic conditions or real estate values could lead to increased charge-offs and necessitate higher provisions for credit losses.
• Interest Rate Risk: Fluctuations in market interest rates can impact net interest margin by affecting the cost of deposits and borrowings relative to loan and investment yields. While the company uses tools like interest rate swaps, it remains exposed to rate movements.
• Economic Conditions: General economic downturns, either nationally or within the company's specific market areas, could negatively affect loan demand, credit quality, and deposit levels.
• Competition: Intense competition from regional banks, national players, and fintech firms could pressure loan and deposit pricing, potentially impacting net interest margin and market share. The need to invest in technology to keep pace with digital offerings could also increase operating expenses.
• Integration Risk: While recent mergers are complete, the ongoing process of fully integrating operations, systems, and cultures carries inherent risks that could impact efficiency or customer retention.
• Regulatory Risk: Changes in banking laws, regulations, or capital requirements (including potential requirements for higher capital due to CRE concentrations) could increase compliance costs or limit business activities.

Conclusion

LINKBANCORP's first quarter of 2025 was marked by a record net income figure, significantly influenced by the strategic divestiture of its New Jersey operations. This move, while providing a one-time financial boost, aligns with the company's broader strategy of refining its geographic focus and concentrating on core markets in Pennsylvania, Maryland, Delaware, and Virginia.

The underlying performance of the banking business shows continued, albeit modest, growth in net interest income driven by loan expansion. However, like many in the sector, the company faces pressure on its net interest margin from funding costs and must navigate a competitive landscape where scale and technological efficiency are increasingly important. While LNKB leverages its community banking model and local relationships as key strengths, it must continue to invest in its operational capabilities and manage credit quality carefully, particularly given the recent increase in non-performing loans and its concentration in commercial real estate.

For investors, the story of LNKB is one of a community bank actively shaping its future through strategic M&A and divestitures, aiming to build value through relationship-based banking. The path forward will depend on its ability to execute its lending strategy effectively in its core markets, manage the inherent risks in its loan portfolio, control costs, and successfully compete against rivals with potentially greater scale and technological resources, all while maintaining its strong capital position. The Q1 results, while benefiting from a non-recurring gain, provide a snapshot of a company in transition, focused on optimizing its structure for future growth within its chosen markets.