PCB Bancorp — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; filed March 9, 2023. PCB Bancorp is a California bank holding company operating PCB Bank, a community bank serving businesses and individuals through branches in California, New York, New Jersey and Texas, plus loan production offices in several states. Its lending is concentrated in commercial and residential real estate and small-business lending. The financial statements received an unqualified audit opinion from Crowe LLP.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $89.6 million | $77.1 million |
| Net income | $35.0 million | $40.1 million |
| Diluted earnings per share | $2.31 | $2.62 |
| Net interest margin | 4.08% | 3.83% |
| Total assets at year-end | $2.42 billion | $2.15 billion |
| Loans held for investment at year-end | $2.05 billion | $1.73 billion |
| Total deposits at year-end | $2.05 billion | $1.87 billion |
- Net interest income increased 16.2%, as higher loan balances and yields more than offset rising funding costs. Average yield on interest-earning assets rose to 4.63% from 4.05%; average cost of interest-bearing liabilities rose to 1.08% from 0.41%.
- Net income fell 12.8%. The principal pressures were higher operating expenses, lower loan-sale gains and a $3.6 million loan-loss provision, compared with a $4.6 million provision reversal in 2021. Noninterest expense increased 18.3% to $51.1 million; noninterest income declined 21.3% to $14.5 million.
- Cash flow from operations was $57.3 million; investing activities used $356.7 million, primarily reflecting loan growth; financing activities provided $243.1 million. Cash and cash equivalents decreased $56.3 million to $147.0 million.
- Shareholders’ equity was $335.4 million. The Bank’s year-end regulatory capital ratios were 16.30% common Tier 1, 17.52% total capital and 14.05% Tier 1 leverage; it met the “well-capitalized” standards.
- Year-end borrowings included $20.0 million of FHLB advances. Additional disclosed borrowing capacity was $650.6 million, including FHLB, Federal Reserve Discount Window and federal funds lines.
Material changes and notable items
- Loans held for investment increased 18.1%; excluding Paycheck Protection Program loans, the increase was 22.7%. Real estate loans were 86.7% of the portfolio, with commercial property loans alone at 63.0%.
- Deposits increased 9.6%, but the mix shifted: noninterest-bearing demand deposits fell to $735.0 million from $830.4 million, while time deposits grew. The average cost of deposits increased to 0.62% from 0.23%. Deposits not covered by FDIC insurance totaled $1.06 billion.
- Allowance for loan losses was $24.9 million, or 1.22% of loans, versus $22.4 million, or 1.29%, in 2021. Nonperforming assets increased to $7.4 million, or 0.30% of assets, from $1.0 million; year-end held-for-investment nonperforming loans were $3.4 million.
- Rising rates reduced the fair value of available-for-sale securities: the portfolio had $15.1 million of pretax net unrealized losses at year-end, and accumulated other comprehensive loss was $10.5 million, net of tax. Management stated it did not intend, and was not likely to be required, to sell the securities before recovery of amortized cost.
- The company received $69.1 million from the U.S. Treasury’s Emergency Capital Investment Program in exchange for Series C preferred stock. The preferred stock pays no dividend during its first 24 months; thereafter its annual rate may be up to 2%, based on program lending criteria.
- Common dividends declared rose to $0.60 per share from $0.44. The company repurchased 362,557 shares for $6.7 million and later extended the repurchase program through February 1, 2024.
Outlook, risks and contingencies
- No formal earnings or balance-sheet guidance is provided. Management warned that deposit pricing pressure was expected to continue in 2023, potentially weighing on profitability and net interest margin. At year-end, the modeled 12-month net interest income sensitivity was +3.6% for a 100-basis-point rate increase and -4.6% for a 100-basis-point decrease.
- PCB planned to adopt CECL on January 1, 2023. It estimated a loan allowance coverage ratio of 1.12%–1.32% and an additional $1.1–$1.4 million reserve for off-balance-sheet exposures; the actual transition adjustment could differ.
- Key exposures include commercial real estate concentration, geographic and customer concentration, interest-rate and deposit-liquidity risk, and dependence on SBA lending and loan-sale gains. Regulatory CRE concentration was 253.9% of risk-based capital, below the cited 300% supervisory indicator but still a material concentration to monitor.
- A 2021 network and data incident exposed certain customer files. The company recorded $220,000 of related legal expenses in 2022, expects further costs, and faces a related lawsuit; it says cyber-liability insurance should provide coverage. Management could not estimate a clear range of additional litigation losses, though it did not expect ordinary-course claims to be material.
Important facts for investors to verify
- Whether deposit costs continue rising, and the pace of deposit outflows or shifts from noninterest-bearing accounts.
- Loan performance, criticized and classified credits, collateral values, and reserve adequacy after CECL adoption—especially in commercial real estate and commercial lines of credit.
- Whether securities losses remain unrealized and whether liquidity needs could require securities sales or higher-cost wholesale funding.
- The actual CECL opening adjustment and any subsequent changes to credit-loss reserves.
- Progress and financial exposure from the cybersecurity litigation, including insurance recovery and any additional expenses.
- Sustainability of loan-sale income, dividends and share repurchases as earnings and funding conditions change.