PCB Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. PCB Bancorp is a bank holding company operating PCB Bank, serving businesses and individuals through branches and loan production offices. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $21.7 | $21.4 | $44.1 | $41.3 |
| Net interest margin | 3.55% | 4.01% | 3.67% | 3.94% |
| Noninterest income | $2.7 | $3.6 | $5.7 | $8.9 |
| Noninterest expense | $13.6 | $12.2 | $27.4 | $24.3 |
| Net income | $7.5 | $9.1 | $17.8 | $19.3 |
| Diluted EPS | $0.52 | $0.60 | $1.22 | $1.27 |
- Earnings drivers: Q2 interest income rose 64.1% year over year, but deposit interest expense increased by $14.0 million, leaving net interest income up only 1.7%. Average cost of interest-bearing deposits rose to 3.97% from 0.42%. Management attributed deposit repricing partly to customers moving funds from noninterest-bearing accounts into money-market and time deposits.
- Other income and costs: Q2 gain on loan sales fell 62.3% to $0.8 million, reflecting lower SBA loan sales and premiums. Q2 noninterest expense increased 11.3%, including higher occupancy, professional fees, regulatory assessments and other expenses. The efficiency ratio rose to 55.91% from 48.98%.
- Balance sheet at June 30: Assets were $2.56 billion, loans held for investment $2.12 billion, deposits $2.19 billion, and shareholders’ equity $340.4 million. Since year-end 2022, assets increased 5.6%, loans 3.7%, and deposits 7.0%.
- Deposits and liquidity: Noninterest-bearing deposits declined $99.7 million from year-end, while interest-bearing deposits increased $241.9 million. Deposits not covered by insurance were $1.034 billion. Cash and cash equivalents were $222.1 million; available borrowing capacity was $720.4 million. Cash plus that capacity covered about 91.1% of uninsured deposits at quarter-end. After quarter-end, the company established a Federal Reserve Borrower-in-Custody arrangement adding $268.9 million of capacity; management said combined cash and borrowing capacity would cover about 117.1% of uninsured deposits.
- Debt and cash flows: No FHLB advances were outstanding at June 30; the $20 million year-end advance had been repaid. For the six months, operating cash flow was $34.6 million, investing cash flow was negative $70.8 million, and financing cash flow was positive $111.3 million. Cash and cash equivalents increased $75.1 million to $222.1 million.
- Credit and capital: The loan allowance was $24.9 million, or 1.17% of held-for-investment loans. Nonperforming loans were $3.8 million, or 0.18% of such loans; allowance coverage was 646.7%. Commercial real estate represented 69.3% of held-for-investment loans. The Bank’s common equity Tier 1 ratio was 16.00% and total capital ratio 17.23%; management said the Bank met applicable capital requirements.
Material changes and unusual items
- Net income declined 17.8% in Q2 and 8.1% for the first six months year over year. Net interest margin contracted despite higher asset yields, as deposit and other funding costs rose sharply.
- Six-month noninterest income fell 36.4%, primarily because loan-sale gains decreased from $5.8 million to $2.1 million. Noninterest expense rose 12.6% for the same period.
- The company adopted CECL (ASC 326) on January 1, 2023. Adoption reduced opening retained earnings by $1.9 million, including a $1.1 million initial increase in the loan allowance and a $1.6 million increase in the off-balance-sheet credit allowance, net of tax effects. The six-month credit-loss reversal was $2.6 million, which management attributed mainly to improved economic forecasts and lower modeled adjustments; Q2 itself recorded a $0.2 million provision.
- Available-for-sale securities had a $15.4 million gross unrealized loss at quarter-end. Management attributed losses to rates and market conditions rather than credit, reported no securities credit allowance, and stated it did not intend or expect to be required to sell before recovery.
- The company repurchased and retired 747,938 shares for $13.6 million under its buyback program during the first quarter; no shares were repurchased in Q2. Common dividends declared were $0.18 per share in Q2. A further $0.18 quarterly dividend was declared July 27, 2023.
Outlook, risks and contingencies
The filing gives no specific earnings, margin, growth or credit-loss guidance. Management described Q2 interest-rate sensitivity as asset-sensitive: modeled net interest income increased 4.6% under an immediate 200-basis-point rate rise and declined 3.6% under a 100-basis-point fall. Economic value of equity was modeled to decline 3.1% under a 200-basis-point rise. Management cautioned that actual results may differ, particularly because deposit behavior, deposit betas, reinvestment yields and customer preferences affect outcomes. The Federal Reserve raised the upper federal funds target range to 5.50% after quarter-end.
Key stated risks include deposit competition and migration to higher-cost products, uninsured-deposit concentration and banking-sector confidence, interest-rate and liquidity exposure, the real-estate-heavy loan portfolio, economic conditions, credit quality, cybersecurity and regulatory changes. A customer-data incident involving alleged ransomware access in 2021 remains subject to a class-action lawsuit. The company reported no accrued legal loss contingency at June 30 and no additional incident expenses in the first half of 2023, but anticipates future costs and said cyber insurance may not cover all losses. Management considered other pending litigation not expected to materially affect the financial statements, while noting additional losses are reasonably possible and not presently estimable.
Investor verification priorities
- Track deposit mix, pricing and uninsured balances, and verify whether the additional Federal Reserve borrowing capacity remains available and under what conditions.
- Monitor net interest margin, deposit costs and actual sensitivity as rates and deposit behavior change.
- Review credit trends in commercial real estate and business-property loans, including nonaccrual balances, risk grades, charge-offs and allowance assumptions under CECL.
- Assess whether loan-sale income and higher operating expenses continue to pressure earnings and efficiency.
- Follow the data-incident litigation, potential future costs and insurance coverage; verify any material change in legal contingencies.
- Consider the securities portfolio’s unrealized losses and potential liquidity or capital effects if securities must be sold before recovery.