PCB Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. PCB Bancorp is a bank holding company operating PCB Bank, serving businesses and individuals through branches and loan production offices in California, the East Coast and Texas.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Net income | $10.3 million; diluted EPS $0.70 | $10.2 million; diluted EPS $0.67 in Q1 2022 |
| Net interest income | $22.4 million | Up 12.1% from $20.0 million |
| Net interest margin | 3.79% | 3.87% in Q1 2022 |
| Interest income / expense | $34.5 million / $12.1 million | Interest expense was $0.9 million in Q1 2022 |
| Credit-loss reversal | $2.8 million | $1.2 million in Q1 2022 |
| Total assets | $2.50 billion | Up 3.3% from year-end 2022 |
| Loans held for investment | $2.09 billion | Up 2.3% from year-end 2022 |
| Total deposits | $2.14 billion | Up 4.7% from year-end 2022 |
| Cash and cash equivalents | $190.5 million | Up $43.5 million from year-end 2022 |
| Shareholders’ equity | $336.8 million | Up $1.4 million from year-end 2022 |
| Nonperforming loans / assets | $3.0 million; 0.12% of assets | $7.4 million / 0.30% at year-end 2022 |
Net income was nearly flat year over year: stronger interest income was substantially offset by higher funding costs, lower loan-sale gains and increased expenses. The efficiency ratio rose to 54.08% from 47.75%. Annualized return on average assets was 1.69%, versus 1.92%; return on average tangible common equity was 15.70%, versus 16.01%.
Net cash provided by operating activities was $18.2 million, compared with $29.2 million in Q1 2022. Investing activities used $41.9 million, while financing activities provided $67.1 million, principally from a $95.7 million net increase in deposits, partly offset by repayment of $20.0 million in FHLB advances, common-stock repurchases and dividends. Cash increased by $43.5 million during the quarter.
The loan portfolio was concentrated in commercial real estate: CRE represented 69.0% of loans held for investment at quarter-end. The allowance for credit losses on loans was $24.7 million, or 1.18% of loans, compared with $24.9 million, or 1.22%, at year-end. The Bank reported no FHLB advances outstanding at March 31. It had approximately $699.8 million in available borrowing capacity across FHLB, Federal Reserve Discount Window and federal funds lines.
Material changes and notable items
- Deposit mix shifted toward higher-cost funding: noninterest-bearing deposits fell $81.0 million, while interest-bearing deposits increased $176.7 million. Time deposits were 48.0% of deposits, up from 38.9% at year-end. Deposits not covered by insurance totaled $1.02 billion.
- Interest expense rose sharply as market rates increased and customers moved funds into interest-bearing accounts and time deposits. Management reported average cost of interest-bearing deposits of 3.42%, compared with 0.33% in Q1 2022.
- Noninterest income declined 42.8% to $3.0 million, primarily because loan-sale gains fell 65.3% to $1.3 million, reflecting lower SBA loan sales and premiums. Noninterest expense increased 13.9% to $13.8 million.
- The company adopted CECL on January 1, 2023. The transition reduced beginning retained earnings by $1.9 million, net of tax, and increased the opening loan and off-balance-sheet credit allowances by $1.1 million and $1.6 million, respectively. Comparisons with 2022 use the prior credit-loss accounting method.
- Unrealized losses on available-for-sale securities were $13.3 million at quarter-end, down from $15.2 million at year-end; the portfolio’s fair value was $144.7 million. Management attributed the losses to interest rates and market conditions, recorded no securities credit-loss allowance, and said it did not intend to sell and was not likely to be required to sell before recovery.
- The company completed its repurchase program, buying and retiring 747,938 shares for $13.6 million overall. Q1 repurchases were 385,381 shares for $6.8 million. The quarterly common dividend declared for Q1 was $0.15 per share; after quarter-end, the board declared $0.18 per share.
Outlook, risks and contingencies
The filing provides no formal earnings or financial guidance. Management said liquidity was supported by cash, deposit gathering and borrowing access, and believed contractual obligations could be met. Its interest-rate model indicated an asset-sensitive net-interest-income profile: a modeled immediate 200-basis-point increase corresponded to a 7.0% increase in net interest income, while a 100-basis-point decline corresponded to a 4.6% decrease. These are model scenarios, not forecasts; results depend on deposit behavior, repricing, growth and other assumptions. The modeled economic value of equity was slightly liability-sensitive.
- Banking-sector confidence and liquidity: The filing warns that recent bank failures and market volatility could prompt deposit withdrawals or shifts to larger institutions and higher-yielding investments. The company identifies its comparatively high uninsured-deposit exposure as a potential source of heightened scrutiny and risk. Cash and available borrowing capacity equaled approximately 87.3% of uninsured deposits.
- Credit and concentration: Real-estate concentration, property values, borrower cash flows, construction outcomes and economic conditions could affect loan performance and the allowance. The CECL estimate relies on forecasts, assumptions and management judgment.
- Cyber incident and litigation: A 2021 network incident involved unauthorized access to certain customer files. A related class-action complaint remains pending. No additional incident-related expense was recorded in Q1 2023; further costs are anticipated, with cyber-liability insurance expected to provide coverage. Management could not estimate a range of additional reasonably possible litigation losses, but did not expect them to be material.
- Capital: The Bank reported capital ratios above applicable well-capitalized thresholds. Its $69.1 million Series C preferred investment under the U.S. Treasury’s ECIP carries no dividend for the first 24 months after issuance; thereafter, the rate is subject to program terms and may be up to 2% annually.
Important facts for investors to verify
- How deposits, especially uninsured balances and time deposits, evolve and how much pricing pressure they put on funding costs and net interest margin.
- Whether available cash and borrowing facilities remain accessible and sufficient under deposit stress; the filing’s liquidity coverage measure is not a guarantee against withdrawals.
- Credit trends in the CRE portfolio, including nonaccrual loans, criticized classifications, collateral values and changes in the CECL allowance.
- Whether modeled interest-rate sensitivity matches actual deposit betas, loan repricing and net interest income as rates change.
- Recovery and liquidity risks associated with the securities portfolio’s unrealized losses, including whether management’s ability to hold the securities changes.
- Developments in the customer-data litigation, associated costs and insurance coverage, and any resulting financial or reputational effects.
- The terms and future dividend cost of the ECIP preferred stock, and the effect of dividends and repurchases on common equity and regulatory capital.