Executive Summary / Key Takeaways

• PB Bankshares, Inc. (PBBK) is executing a strategic pivot under current leadership, shifting from a traditional savings bank model towards expanding its commercial lending and deposit portfolios to diversify its balance sheet and enhance profitability.
• First quarter 2025 results demonstrate progress, with net income increasing 49.2% year-over-year, driven by strong net interest income growth (up 16.6%) and an expanding net interest margin (up 41 basis points to 2.85%).
• Balance sheet growth was fueled by a 3.8% increase in deposits and strategic deployment of funds from maturing securities into commercial real estate loans (up 3.1% in the quarter) and cash, reflecting the ongoing portfolio transformation.
• While asset quality remains benign with stable non-performing loans and a strong allowance coverage ratio, the competitive landscape highlights challenges related to scale, operational efficiency, and technological capabilities compared to larger regional peers.
• Key factors for investors to monitor include the continued execution of the commercial strategy, managing deposit costs in a dynamic rate environment, potential investments in technology to enhance competitiveness, and the impact of broader economic conditions on credit quality.

Presence Bank's Evolution: A Strategic Pivot in a Competitive Landscape

PB Bankshares, Inc., the holding company for Presence Bank, operates as a community bank primarily serving Chester, Lancaster, and surrounding counties in Pennsylvania. Founded in 1919 as a state-chartered savings bank, its historical focus centered on residential real estate lending funded by retail deposits. This foundation provided stability but also inherent interest rate sensitivity and limited diversification.

A significant strategic shift began in September 2019 with the appointment of Janak M. Amin as President and CEO. Under his leadership, the bank embarked on a deliberate transformation to build a robust commercial lending infrastructure, specifically targeting growth in commercial real estate (CRE) and commercial and industrial (C&I) loans. The stated objectives of this pivot are clear: diversify the balance sheet, improve the bank's interest rate risk profile, and ultimately increase interest income. Complementing this lending focus is an emphasis on attracting commercial deposit accounts, aiming for a more stable and potentially lower-cost funding base. The completion of the mutual-to-stock conversion and subsequent IPO in July 2021 provided capital support for this strategic evolution.

This strategic direction positions PBBK within a highly competitive regional banking market. The bank competes directly with a range of institutions, from smaller community banks to larger regional players like First Citizens BancShares (FCNCA), First Financial Northwest (FFNW), CBTX, Inc. (CBTX), and Fifth Third Banccorp (FITB). Compared to these larger peers, PBBK operates at a significantly smaller scale, holding an estimated 0.1-0.2% market share in its Pennsylvania regional footprint. This scale difference translates into quantifiable disparities in financial performance metrics. For instance, PBBK's latest trailing twelve months (TTM) net profit margin of 7.83% and return on equity (ROE) of 4% lag considerably behind larger competitors like FCNCA (19% net margin, 12% ROE) and FITB (18% net margin, 12% ROE). Similarly, PBBK's estimated annual revenue growth rate of 5-7% trails the higher growth rates observed at some larger institutions (e.g., FCNCA's ~12%, FITB's ~10%).

PBBK's competitive advantages lie primarily in its established local network and deep community relationships, which can foster stronger customer loyalty and potentially contribute to more stable deposit funding. Its regional focus also provides specific regulatory expertise within its operating area. However, the bank faces disadvantages inherent in its smaller scale, including potentially higher operating costs per unit and, notably, a lag in technological capabilities compared to more digitally advanced rivals.

Financial Performance Reflects Strategic Momentum

The first quarter of 2025 provided tangible evidence of the strategic pivot's impact on financial performance. Net income for the three months ended March 31, 2025, rose to $473,000, a significant 49.2% increase from $317,000 in the same period of 2024. This improvement was primarily driven by growth in net interest income and noninterest income, partially offset by higher operating expenses and provision for credit losses.

Net interest income, the core driver of bank profitability, increased by $438,000, or 16.6%, reaching $3.07 million in Q1 2025 compared to $2.632 million in Q1 2024. This expansion was a result of both an increase in the average balance of interest-earning assets and an improved net interest margin. The average yield on interest-earning assets rose by 34 basis points to 5.54%, while the average cost of interest-bearing liabilities decreased slightly by 5 basis points to 3.19%. This favorable movement in yields and costs led to a 41 basis point expansion in the net interest margin, from 2.44% in Q1 2024 to 2.85% in Q1 2025.

Breaking down the interest income components, interest income on loans saw a robust increase of $615,000, or 13.5%, reaching $5.166 million. This growth stemmed from both a higher average loan yield (5.99% in Q1 2025 vs. 5.53% in Q1 2024) and an increase in average loan balances, directly reflecting the strategic push into commercial lending. Conversely, interest income on cash and cash equivalents decreased significantly due to lower average balances and yields, a consequence of utilizing cash for loan growth and the impact of Federal Reserve rate cuts in the latter half of 2024.

On the expense side, interest expense on deposits increased by $46,000, or 1.9%, as the bank managed deposit costs in a competitive environment. This was primarily due to a higher average balance of interest-bearing deposits, particularly certificates of deposit, which saw increased balances due to promotional specials and the use of brokered deposits to fund loan growth. However, interest expense on borrowings decreased by $131,000, or 26.4%, as higher-cost Federal Home Loan Bank (FHLB) borrowings matured and were not replaced.

Noninterest income saw a notable increase of $67,000, or 35.8%, totaling $254,000 in Q1 2025. This was largely driven by a $46,000 increase in "other income," which included loan-related fee income from brokering interest rate swap agreements for customers, and a positive swing in equity securities performance (a $12,000 gain in Q1 2025 versus an $8,000 loss in Q1 2024).

Operating expenses also increased, rising by $163,000, or 6.5%, to $2.661 million. The primary drivers were higher salaries and employee benefits ($114,000 increase) due to additional staffing and annual salary adjustments, and increased occupancy and equipment costs ($51,000 increase), partly attributable to a new administrative office lease.

The provision for credit losses increased to $61,000 in Q1 2025, compared to a reversal of $84,000 in Q1 2024. Management attributed this increase primarily to changes in the mix and growth of the loan portfolio during the period.

Balance Sheet Evolution and Liquidity Management

The strategic pivot is clearly visible in the evolution of PBBK's balance sheet. Total assets grew by $15.8 million, or 3.5%, from $451.3 million at December 31, 2024, to $467.1 million at March 31, 2025. This growth was primarily funded by an increase in total deposits, which rose by $13.4 million, or 3.8%, to $367.6 million. The deposit growth was concentrated in certificates of deposit, money market accounts, and interest-bearing demand deposits, partially offset by a decrease in noninterest-bearing demand deposits as customers sought higher yields.

The increase in assets was largely deployed into cash and cash equivalents, which surged by $25.0 million to $62.8 million, and net loans receivable, which increased by $1.9 million to $346.7 million. The growth in loans was predominantly in the commercial real estate portfolio, which increased by $6.4 million, or 3.1%, to $211.6 million, underscoring the continued execution of the commercial lending strategy. This loan and cash growth was facilitated by the maturity of $14.4 million in debt securities available-for-sale, primarily short-term treasury securities, which were not fully reinvested in securities but instead used for liquidity and loan funding.

Liquidity remains a key focus. At March 31, 2025, PBBK maintained a strong liquidity position with $62.8 million in cash and cash equivalents and $15.6 million in unpledged available-for-sale debt securities. The bank also has significant borrowing capacity, including approximately $178.9 million from the FHLB (with $44.2 million advanced), $7.5 million from Atlantic Community Bankers Bank, $5.0 million from SouthState Bank, N.A. (SSY), and $2.0 million from the Federal Reserve discount window. While the liquidity ratio averaged 14.0% in Q1 2025 (down from 18.0% in Q1 2024), management believes it has sufficient sources to meet short and long-term needs. A notable point of attention is the $144.7 million in certificates of deposit maturing within one year, representing 39.4% of total deposits. Management expects a substantial portion to be renewed, but acknowledges that retaining these deposits may require paying higher rates depending on market conditions.

Total borrowings from the FHLB increased slightly by $1.7 million to $44.2 million, reflecting new advances partially offset by repayments.

Asset Quality and Credit Risk Management

PBBK's asset quality metrics remained stable and appeared benign in the first quarter. Non-performing loans totaled $1.094 million at March 31, 2025, a slight decrease from $1.122 million at December 31, 2024, representing 0.31% of total loans. Management reported that delinquencies remain benign.

The Allowance for Credit Losses (ACL) on loans stood at $4.447 million at March 31, 2025, up from $4.356 million at December 31, 2024. The ACL coverage ratio relative to total loans outstanding was 1.26% at March 31, 2025, a slight increase from 1.25% at the end of 2024. Management deems reserve levels to be adequate.

The determination of the ACL is a critical accounting estimate, inherently subjective and susceptible to changes based on economic conditions and collateral values. PBBK estimates the ACL using a methodology that projects lifetime credit losses based on forecasts of economic parameters and qualitative adjustments. Management acknowledges the sensitivity of the model to changes in economic forecasts; for example, a specific adverse change in forecasted unemployment and GDP growth would increase the calculated ACL by 0.9%. The bank also segments and stress tests its commercial real estate portfolio as part of its risk management process, a prudent measure given the strategic focus on this segment.

Technology: A Competitive Imperative

In the modern banking landscape, technology is increasingly a key differentiator, impacting efficiency, customer experience, and competitive positioning. While details regarding PBBK's specific core technology stack or significant R&D initiatives are not readily available, the competitive analysis highlights that PBBK's technological offerings are perceived as "basic" and potentially lag behind larger competitors in areas like processing speed and digital adoption rates.

This technological lag presents a quantifiable challenge. Less advanced digital tools can lead to higher operating costs per unit compared to more efficient rivals and may hinder the bank's ability to attract and retain customers who increasingly demand seamless digital interactions. For example, the competitive analysis suggests PBBK's operating costs per loan origination could be higher due to less automation, and digital adoption rates might trail peers.

Addressing this potential technological gap is crucial for PBBK's long-term competitiveness and profitability. While the Q1 2025 results show an increase in "Data and item processing" expense, indicating ongoing operational technology costs, the strategic imperative to enhance digital capabilities to improve efficiency and customer offerings is likely a key consideration for future investment, even if specific plans or targets were not detailed in the latest filing. The success of the strategic pivot into commercial banking may increasingly depend on providing competitive digital tools for commercial clients.

Outlook and Key Risks

PBBK's outlook is tied to the continued execution of its strategic transformation and the broader economic environment. While Q1 2025 results show positive momentum with improved profitability and margin expansion, management cautions that these results are not necessarily indicative of the full year.

Key to the outlook is the bank's ability to manage its funding costs, particularly the large block of certificates of deposit maturing within the next year. Management expects a substantial portion to be renewed, but success will depend on competitive market rates, which could impact future interest expense. The strategic focus on attracting commercial deposits is intended to provide a more stable funding base over time.

The bank anticipates having sufficient funds to meet its current lending commitments, supported by its liquidity position and borrowing capacity.

However, several risks could impact the investment thesis:

• Economic Conditions: General economic downturns, nationally or in PBBK's market areas, could adversely affect loan demand, deposit flows, real estate values, and increase loan delinquencies and charge-offs.
• Interest Rate Risk: Fluctuations in interest rates, while partially mitigated by the strategic shift, can still impact net interest margin and the fair value of financial instruments. The sensitivity of the ACL to economic forecasts also highlights this risk.
• Credit Risk: Despite current benign conditions, changes in the level and direction of loan delinquencies and write-offs, particularly within the growing commercial real estate portfolio, could necessitate higher provisions for credit losses. Management's ACL estimates are inherently subjective.
• Competition: Intense competition from other banks and non-traditional providers (fintech) could pressure margins, hinder loan and deposit growth, and require increased investment in technology and services.
• Regulatory Changes: Changes in laws, regulations, fees (like FDIC premiums), and capital requirements could impact operations and profitability.
• Deposit Retention: Failure to retain a substantial portion of maturing deposits could force the bank to seek higher-cost funding.
• Operational and Strategic Execution: The ability to successfully implement the commercial lending strategy, integrate new products/services, and attract/retain skilled personnel is crucial. Cyber risk also remains a significant operational threat.

Conclusion

PB Bankshares is in the midst of a deliberate strategic transformation, moving beyond its traditional residential lending roots to build a more diversified commercial banking franchise. The first quarter of 2025 demonstrates tangible progress, with improved profitability, expanding net interest margin, and continued growth in the target commercial real estate portfolio. The bank maintains a solid capital position and adequate liquidity.

However, the journey is not without its challenges. PBBK operates in a competitive environment where scale and technological capabilities are increasingly important differentiators. While its local focus provides a foundational strength, addressing potential lags in operational efficiency and digital offerings compared to larger peers will be crucial for sustained competitiveness and future growth. Managing deposit costs in the current rate environment and navigating potential shifts in asset quality remain key areas for management focus. For investors, the success of PBBK's strategic pivot, its ability to effectively manage funding costs, and its response to the technological demands of the modern banking landscape will be critical determinants of long-term value creation.