PCB Bancorp — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. PCB Bancorp is a bank holding company operating Pacific City Bank, serving businesses and individuals through branches and loan production offices.
Financial performance and position
- Q2 earnings: Net income was $9.1 million, down 7.6% from $9.8 million a year earlier. Diluted EPS was $0.60 versus $0.64. For the first half, net income was $19.3 million versus $18.4 million; diluted EPS was $1.27 versus $1.19.
- Net interest: Q2 net interest income rose 12.4% to $21.4 million; net interest margin increased to 4.01% from 3.83%. First-half net interest income rose 12.3% to $41.3 million and margin was 3.94%, compared with 3.77%.
- Other income and expenses: Q2 noninterest income fell 29.2% to $3.6 million, primarily as loan-sale gains declined to $2.0 million from $4.0 million. Noninterest expense rose 9.9% to $12.2 million, including higher salaries and employee benefits. The efficiency ratio was 48.98%, up from 46.13%.
- Credit costs and quality: The company recorded a $109,000 Q2 reversal for loan losses, versus a $934,000 reversal in Q2 2021; the first-half reversal was $1.3 million versus $2.1 million. The allowance was $21.1 million, or 1.15% of loans held for investment, down from 1.29% at year-end. Nonperforming loans were $1.2 million and nonperforming assets $2.0 million, including $808,000 of other real estate owned.
- Balance sheet and liquidity: Total assets were $2.345 billion, up 9.1% from December 31, 2021. Loans held for investment reached $1.833 billion, up 5.8%; deposits were $1.998 billion, up 7.0%. Cash and cash equivalents were $299.9 million. Available borrowing capacity was $636.9 million; the company had no FHLB advances outstanding at quarter-end.
- Cash flow and capital: First-half operating cash flow was $38.8 million; investing cash use was $127.9 million and financing cash provided was $185.7 million. Shareholders’ equity was $334.4 million, including a $69.1 million U.S. Treasury preferred-stock investment through ECIP. The Bank’s total risk-based capital ratio was 18.92% and common Tier 1 ratio was 17.79%.
- Securities and debt: Available-for-sale securities had a $9.6 million net unrealized loss at June 30, contributing to accumulated other comprehensive loss of $6.6 million. Management said it did not intend, and was not likely to be required, to sell loss-position securities before recovery. No FHLB advances were outstanding.
Material changes and management commentary
- Loan growth was driven mainly by commercial and residential property lending. SBA PPP balances declined to $1.6 million from $65.3 million at year-end, primarily through payoffs.
- Q2 net interest income benefited from higher average earning-asset balances and yields amid rising rates. Management noted that rate changes affect both asset yields and funding costs.
- Noninterest expense growth reflected higher staffing and compensation; full-time equivalent employees increased to 271 from 248 year over year.
- The $69.1 million ECIP preferred investment was issued May 24, 2022. It carries no dividend for the first 24 months; subsequent dividend terms depend on lending criteria, with an annual rate up to 2%.
- No specific earnings or financial guidance was provided. Management cautioned that COVID-19 effects, inflation, economic conditions, interest rates, real estate values, borrower performance, and loan concentration could adversely affect results.
Risks, contingencies, and subsequent events
- The loan portfolio is heavily weighted to real estate: 87.7% of loans held for investment at June 30. Credit performance, collateral values, and economic conditions remain key risks.
- Uninsured deposits totaled $1.20 billion, up 30.4% from year-end. The filing reports substantial unused credit commitments, including $218.9 million in unused lines of credit and $40.6 million in unfunded loan commitments.
- A 2021 network/data incident involved access to certain customer files and a related lawsuit seeking class-action and other relief. The company reported no additional incident expenses in the first half of 2022, expects future expenses, and says cyber-liability insurance should provide coverage. It could not estimate reasonably possible additional litigation losses.
- The company plans to adopt the expected-credit-loss standard (CECL) on January 1, 2023 and expects a one-time allowance adjustment that could be material; the amount is not yet stated.
- After quarter-end, the Board declared a $0.15 per-share dividend and approved a new repurchase program of up to 5% of outstanding common shares. The bank also announced it would change its name to PCB Bank effective August 25, 2022.
Key facts for investors to verify
- Whether loan growth and the improved net interest margin can offset rising funding costs and higher operating expenses.
- Credit trends, especially real-estate exposure, nonperforming assets, and the adequacy of the allowance as CECL adoption approaches.
- Deposit stability and funding implications of the $1.20 billion in uninsured deposits.
- The scale and duration of securities-related unrealized losses and any effect of interest-rate movements on capital or liquidity.
- Potential costs and outcomes of the customer-data litigation, and the scope of available insurance coverage.