PCB Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. PCB Bancorp is a bank holding company operating PCB Bank, serving businesses and individuals through branches and loan production offices. The bank changed its name from Pacific City Bank to PCB Bank during the quarter.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $24.0 million | $20.2 million | $65.4 million | $57.0 million |
| Net interest margin | 4.25% | 3.93% | 4.05% | 3.82% |
| Provision (reversal) for loan losses | $3.8 million | $(1.1) million | $2.5 million | $(3.1) million |
| Noninterest income | $3.2 million | $5.6 million | $12.1 million | $13.6 million |
| Noninterest expense | $13.7 million | $11.2 million | $38.0 million | $32.0 million |
| Net income | $7.0 million | $11.0 million | $26.3 million | $29.4 million |
| Diluted EPS | $0.46 | $0.73 | $1.73 | $1.92 |
Quarterly net income fell 36.9% year over year despite higher net interest income, principally reflecting the shift from a loan-loss reserve reversal to a provision, lower gains on loan sales, and higher operating costs. Q3 return on average assets was 1.19% (2.11% a year earlier); the efficiency ratio was 50.35% (43.51%).
Financial position, cash flow and capital
- At September 30, 2022, assets were $2.33 billion, up 8.2% from year-end 2021. Loans held for investment were $1.96 billion, up 13.1%; deposits were $1.98 billion, up 5.9%.
- Loans were approximately 100% of deposits. Noninterest-bearing deposits declined 2.5% from year-end as customers shifted toward interest-bearing accounts amid rising rates and deposit competition. Deposits not covered by deposit insurance totaled $1.06 billion.
- Cash and cash equivalents were $154.0 million, down $49.2 million from year-end. Nine-month operating cash flow was $40.7 million, investing cash outflow was $251.8 million, and financing cash inflow was $161.9 million. Management reported $680.2 million of available borrowing capacity, primarily through the FHLB.
- No FHLB advances were outstanding at quarter-end. The Bank had $586.1 million of FHLB capacity, $29.1 million of Federal Reserve Discount Window capacity, and $65.0 million of overnight federal funds lines.
- Shareholders’ equity was $332.7 million. The Bank reported 16.82% common Tier 1 capital, 18.02% total capital, and a 14.47% Tier 1 leverage ratio; each exceeded the stated well-capitalized thresholds.
- The U.S. Treasury invested $69.1 million under the Emergency Capital Investment Program in Series C preferred stock. It carries no dividend for its first 24 months; subsequent annual dividends may be up to 2%, subject to program terms.
Material changes and asset quality
- Interest income rose with loan growth and higher market rates, while deposit expense increased as rates rose. Q3 interest expense was $2.8 million versus $0.9 million a year earlier.
- Loan-sale gains declined 66.9% in Q3, to $1.4 million, mainly due to lower SBA loan premiums and lower sales volume. Noninterest expense rose 21.9%, with higher staffing, branch, marketing, and other costs; FTEs increased to 273 from 249.
- Real estate loans represented 87.8% of loans held for investment. The allowance was $23.8 million, or 1.21% of those loans, compared with 1.29% at year-end 2021.
- Nonaccrual loans increased to $7.4 million from $1.0 million at year-end, primarily due to one credit relationship. Nonperforming loans were 0.38% of loans; the allowance covered 321% of nonperforming loans. Q3 net charge-offs were $1.1 million, mainly in commercial lines of credit.
- Available-for-sale securities had $15.9 million of gross unrealized losses at quarter-end, versus $1.3 million at year-end 2021, largely reflecting market-rate changes. The company stated it did not intend, and was not likely required, to sell the securities before recovery and recorded no impairment.
Outlook, risks and unusual items
- The filing gives no quantified earnings or margin guidance. Management said it expects to meet contractual obligations through cash, operating profitability, loan and securities repayments, deposits, and available borrowing facilities.
- The company planned to adopt the expected-credit-loss standard (CECL) on January 1, 2023. It anticipated a one-time cumulative adjustment to the allowance that could be material; implementation analysis and testing were ongoing.
- Key risks include inflation and rate changes, deposit competition and funding costs, real-estate and commercial-borrower credit exposure, loan concentration in real estate, and the ability to manage credit risk and liquidity.
- A 2021 network/data incident resulted in a lawsuit alleging privacy-related claims. No additional incident expense was recorded in Q3 or the first nine months of 2022; the company expects future expenses, says cyber-liability insurance should provide coverage, and cannot rule out legal or reputational consequences.
- Other litigation was described as ordinary-course and not expected to materially affect the financial statements, though additional losses were reasonably possible and not estimable. The board declared a $0.15-per-share common dividend after quarter-end, payable in November 2022.
Important facts for investors to verify
- Whether the elevated nonaccrual balance tied to a single credit relationship worsens, resolves, or requires additional provision or charge-offs.
- How deposit pricing, uninsured deposit balances, and a roughly 100% loans-to-deposits ratio evolve as competition and interest rates change.
- The expected size and capital impact of the January 2023 CECL adoption adjustment.
- Whether securities unrealized losses remain temporary and whether liquidity needs could require securities sales.
- The ultimate cost, insurance recovery, and outcome of the data-incident lawsuit.
- Whether loan growth and margin gains can offset lower loan-sale gains and higher operating expenses.