PCB Bancorp — Q3 2023 Form 10-Q
Business context and reporting period. PCB Bancorp is a bank holding company operating PCB Bank, a single-segment bank serving businesses and individuals. The report covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are primarily to December 31, 2022. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial results and condition
- Q3 earnings: Net income was $7.0 million, up 1.0% from $7.0 million a year earlier. Diluted EPS was $0.49 versus $0.46. For the first nine months, net income fell to $24.8 million from $26.3 million, and diluted EPS was $1.71 versus $1.73.
- Interest income and margins: Q3 net interest income declined 6.6% to $22.4 million; net interest margin contracted to 3.57% from 4.25%. For nine months, net interest income rose 1.9% to $66.6 million, while margin eased to 3.63% from 4.05%. Higher asset yields were outweighed in Q3 by sharply higher deposit costs.
- Other income and expenses: Q3 noninterest income decreased 21.2% to $2.5 million, mainly as loan-sale gains fell to $0.7 million from $1.4 million. Nine-month noninterest income declined 32.5% to $8.2 million. Noninterest expense rose 3.7% in Q3 to $14.2 million and 9.4% for nine months to $41.6 million. Q3 efficiency ratio was 56.94%, compared with 50.35%.
- Credit costs and asset quality: Q3 provision for credit losses was $0.8 million, versus $3.8 million in Q3 2022; the nine-month period recorded a $1.8 million reversal, versus $2.5 million provision a year earlier. Nonperforming loans were $3.7 million, or 0.17% of loans, versus $7.4 million and 0.38% a year earlier. The loan allowance was $25.6 million, or 1.18% of loans. 2023 credit-loss amounts reflect adoption of CECL; prior-period figures use the prior accounting model.
- Balance sheet and funding: Total assets were $2.568 billion, up 6.1% from year-end; loans held for investment were $2.168 billion, up 5.9%; deposits were $2.192 billion, up 7.1%. Noninterest-bearing deposits declined to $611.0 million from $735.0 million, while time deposits increased to $1.122 billion from $796.3 million. Deposits not covered by insurance were $983.9 million, approximately 44.9% of deposits.
- Liquidity and debt: Cash and cash equivalents were $192.4 million. There were no FHLB advances outstanding at quarter-end. Available borrowing capacity was reported at $1.195 billion, including $639.1 million from the FHLB, $490.6 million from the Federal Reserve Discount Window and $65.0 million in overnight federal funds lines. Cash and borrowing capacity together equaled approximately 141% of uninsured deposits.
- Cash flow: For nine months, operating activities generated $53.5 million; investing activities used $120.4 million, largely reflecting loan growth; financing activities provided $112.2 million, including $146.1 million of net deposit growth, offset partly by share repurchases and dividends. Cash increased $45.3 million.
- Capital: Shareholders’ equity was $341.9 million. PCB Bank’s common equity tier 1 ratio was 15.87%, total capital ratio 17.11%, and leverage ratio 13.44%; the filing says the Bank met applicable capital requirements. Tangible common equity to assets, a non-GAAP measure, was 10.62%.
Material changes and management commentary
- Management attributed pressure on Q3 net interest income to deposit repricing and migration from noninterest-bearing accounts into interest-bearing and time deposits. Average interest-bearing deposit cost rose to 4.17% from 0.98% year over year; total deposit cost rose to 2.97% from 0.57%.
- Management said the nine-month credit-loss reversal reflected net recoveries, improved credit quality and improved economic forecasts. Q3 provision reflected loan growth and revised assumptions used in qualitative credit-loss adjustments.
- The loan portfolio remains concentrated in commercial real estate: CRE was 69.4% of loans held for investment at September 30. Management identifies real-estate values, borrower cash flows, construction completion and interest-rate changes as relevant credit risks.
- Unrealized losses on available-for-sale securities were $19.3 million at quarter-end. Management attributed them to interest rates and illiquidity, reported no securities credit-loss allowance, and stated it did not expect to sell the securities before recovery.
- CECL adoption on January 1, 2023 reduced opening retained earnings by $1.9 million, net of tax. The allowance methodology uses forecast assumptions and qualitative adjustments requiring management judgment.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings, margin, loan-growth or deposit-growth guidance. Management’s forward-looking statements are subject to economic, credit, interest-rate, liquidity, regulatory, competition and cybersecurity risks.
- Interest-rate modeling showed a modestly asset-sensitive net interest income profile: a 200-basis-point increase was modeled to raise NII 3.0%, while a 200-basis-point decrease was modeled to reduce it 2.5%. Economic value of equity was modeled to decline 7.8% under a 200-basis-point increase. Results depend on assumptions, including deposit behavior and repricing.
- A proposed settlement of $700,000 related to the 2021 network/data incident received preliminary court approval; final approval was scheduled for February 2024. The company expected applicable insurance to cover the full settlement, subject to final approval.
- On October 25, 2023, a director resigned from the Audit Committee after the company identified that consulting fees made her ineligible under applicable independence rules. The company reported the committee then had three independent members and was compliant.
- The Board declared a $0.18-per-share common dividend on October 25, 2023, payable on or about November 17, 2023. A new buyback program authorized up to 720,000 shares through August 2, 2024; 67,202 shares had been repurchased by September 30.
Most important facts for investors to verify
- Whether deposit pricing and the shift toward time deposits continue to compress net interest margin, and how much of the deposit base remains uninsured.
- Whether reported borrowing capacity remains available under stress and whether deposit outflows or customer behavior change.
- Credit performance in the CRE portfolio, including borrower repayment capacity, collateral values, nonaccrual trends and the adequacy of the CECL allowance.
- Whether securities unrealized losses remain recoverable without forced sales, particularly if liquidity needs or interest rates change.
- Final court approval and insurance coverage for the data-incident settlement, and any material change in related legal exposure.
- Effects of the audit committee independence matter, regulatory developments, buybacks and dividends on governance, capital and liquidity.