Executive Summary / Key Takeaways

• PCB Bancorp demonstrated robust financial performance in Q1 2025, with net income available to common shareholders increasing 64.2% year-over-year, driven by strong net interest income growth and disciplined expense management, despite an increase in credit loss provision.
• The company maintains solid capital ratios, comfortably exceeding regulatory minimums and capital conservation buffers, providing a strong foundation for growth and resilience against potential economic headwinds.
• Loan and deposit growth in Q1 2025 signal continued business momentum, particularly within its target small and middle market segments and diverse geographic footprint across California, the East Coast, and Texas.
• Key risks include the identified material weakness in internal control over financial reporting, the uncertainty surrounding the conditional repurchase option for the ECIP preferred stock, and sensitivity to macroeconomic conditions impacting credit quality and interest rate fluctuations.
• While lacking specific, quantifiable technological differentiators compared to some rivals, PCB's strategic focus on a community-oriented approach and accessible branch/LPO network serves as a competitive counterpoint, fostering customer loyalty in its niche markets.

Setting the Scene: A Community Bank's Foundation and Evolving Landscape

PCB Bancorp operates through its sole subsidiary, PCB Bank, a California state-chartered bank deeply rooted in serving small and middle market businesses and individuals. With a history that includes becoming a public entity around 2018 and strategically expanding its physical presence across key U.S. markets – encompassing nine full-service branches in Southern California, three on the East Coast (New York and New Jersey), and two in Texas, complemented by four loan production offices – PCB has built a business model centered on relationship banking and accessibility. This multi-regional footprint allows PCB to tap into diverse economic pockets, mitigating concentration risk to a single locale while catering to specific community needs.

The banking landscape is intensely competitive, featuring a wide array of local, regional, and national institutions, as well as non-bank financial service providers and increasingly, fintech firms. PCB finds itself competing directly with regional players like Preferred Bank (PFBC), Pacific Premier Bancorp (PPBI), Banc of California (BANC), and Hanmi Bank (HAFC), many of whom also target commercial real estate and business lending. While some competitors, such as PFBC and PPBI, have invested heavily in advanced digital platforms and AI-driven processes leading to faster transaction times and potentially lower operating costs per unit, PCB's strategic response has emphasized its tangible presence and community ties. The company's network of branches and loan production offices aims to provide a level of personalized service and local market understanding that can foster stronger customer relationships and loyalty, potentially leading to lower customer acquisition costs compared to rivals relying solely on digital channels. This focus on accessibility and relationship banking serves as a core competitive differentiator, particularly in markets where a physical presence and personal touch remain valued.

While specific, proprietary technological differentiators for PCB itself are not detailed, it does highlight operational improvements, such as the completion of a core system conversion in April 2024. This suggests an ongoing effort to modernize its infrastructure, which is crucial for maintaining efficiency and offering competitive services in a digitally evolving industry. The competitive analysis indicates that rivals are leveraging technology for faster processing and onboarding. For PCB, the "so what" for investors lies in how effectively its ongoing operational enhancements and strategic emphasis on relationship banking can counter the technological advantages of some competitors. Success will depend on whether its community-focused model can continue to drive loan and deposit growth and maintain profitability despite potentially higher operational costs per transaction compared to more digitally streamlined institutions.

Financial Performance: Strong Q1 2025 Momentum

PCB Bancorp delivered a compelling financial performance in the first quarter of 2025, showcasing significant year-over-year growth. Net income available to common shareholders surged to $7.7 million, a substantial 64.2% increase from $4.7 million in the same period of 2024. This translated to basic and diluted earnings per common share of $0.53 for Q1 2025, up from $0.33 in Q1 2024.

The primary engine behind this improved profitability was a robust increase in net interest income, which rose 15.6% to $24.3 million in Q1 2025 from $21.0 million in Q1 2024. This expansion was largely attributable to a 10.2% increase in the average balance of interest-earning assets, reaching $3.00 billion, coupled with a 57.0 basis point decrease in the average cost of interest-bearing liabilities. While the average yield on interest-earning assets saw a slight decrease of 9.0 basis points to 6.33%, the more significant decrease in funding costs helped widen the net interest margin to 3.28% in Q1 2025, up from 3.10% in Q1 2024.

Analyzing the components, interest and fees on loans, the largest contributor to interest income, increased 9.6% to $43.0 million, driven by an 11.8% increase in the average loan balance. The average yield on loans decreased slightly by 7.0 basis points, influenced by market rates and deferred loan fees, partially offset by higher accretion of loan discounts. Interest expense on deposits increased 2.7% to $22.6 million, primarily due to a 17.1% increase in the average balance of interest-bearing deposits, even as the average cost of these deposits decreased by 56.0 basis points, reflecting changes in market rates. Interest expense on other borrowings saw a significant decrease due to lower average balances and costs.

Noninterest income experienced a 12.4% decrease year-over-year, totaling $2.6 million in Q1 2025 compared to $2.9 million in Q1 2024. This was mainly due to lower loan servicing income and a decrease in the gain on sale of loans, reflecting reduced sales volume and lower premiums on SBA loans in the secondary market.

Total noninterest expense decreased by a notable 11.5% to $14.5 million in Q1 2025 from $16.4 million in Q1 2024. This improvement was largely driven by a significant reduction in professional fees following the completion of a core system conversion in April 2024, as well as lower marketing and data processing expenses. Salaries and employee benefits saw a modest decrease despite an increase in bonus accruals, partly offset by increased direct loan origination costs. Other expenses included an impairment loss on operating lease assets and legal settlement contingencies in Q1 2025, while the prior year included termination charges for the legacy core system and an SBA loan guarantee expense. The efficiency ratio improved significantly to 53.88% in Q1 2025 from 68.29% in Q1 2024, indicating better cost control relative to revenue.

The provision for credit losses increased to $1.6 million in Q1 2025 from $1.1 million in Q1 2024. This increase was primarily attributed to growth in the loan portfolio, higher net charge-offs, and increased quantitatively measured loss reserves. The quantitative reserve increase was influenced by updated macroeconomic forecasts, which projected a worsened year-over-year change in real GDP growth (down to 1.7% from 2.1%) and a higher unemployment rate (up to 4.4% from 4.3%), leading to higher expected loss measurements across loan segments. This highlights the sensitivity of the allowance for credit losses to prevailing economic outlooks.

Financial Condition and Capital Strength

PCB Bancorp's balance sheet expanded in Q1 2025, with total assets growing 5.1% to $3.22 billion at March 31, 2025, from $3.06 billion at December 31, 2024. This growth was primarily fueled by increases in loans held-for-investment and deposits.

Loans held-for-investment grew 3.7% to $2.73 billion at March 31, 2025, up from $2.63 billion at the end of 2024. This growth was driven by new term loan originations and an increase in lines of credit utilization, partially offset by pay-downs and charge-offs. Commercial real estate loans remain the largest component of the portfolio (66.6%), followed by commercial and industrial (18.1%) and consumer loans (15.3%). Asset quality metrics showed a slight increase in nonperforming loans, which totaled $6.25 million at March 31, 2025, up from $4.69 million at December 31, 2024. The ratio of nonperforming loans to total loans held-for-investment increased to 0.23% from 0.18%. The allowance for credit losses on loans stood at $31.9 million, representing 1.17% of loans held-for-investment, a slight increase from 1.16% at the end of 2024. While nonperforming loans increased, the coverage ratio of ACL to nonperforming loans remained strong at 511.24%.

Total deposits increased 3.8% to $2.71 billion at March 31, 2025, from $2.62 billion at December 31, 2024. Growth was seen across noninterest-bearing demand deposits, savings, NOW, money market, and retail time deposits, partially offset by a decrease in brokered time deposits. Noninterest-bearing deposits constituted 20.8% of the total deposit base. Estimated total deposits not covered by deposit insurance increased to $1.13 billion, representing a potential liquidity consideration.

Shareholders equity saw a significant increase of 11.8%, rising to $406.6 million at March 31, 2025, from $363.8 million at the end of 2024. This increase was primarily driven by net income, the recognition of a $35.8 million option derivative related to the ECIP preferred stock as a capital contribution, and a decrease in accumulated other comprehensive loss (related to unrealized losses on securities).

The company maintains robust regulatory capital ratios, comfortably exceeding minimum requirements and capital conservation buffers. As of March 31, 2025, PCB Bancorp's Common Tier 1 Capital to Risk-Weighted Assets ratio was 12.52%, Tier 1 Capital to Risk-Weighted Assets was 15.04%, Total Capital to Risk-Weighted Assets was 16.25%, and Tier 1 Capital to Average Assets was 13.16%. For PCB Bank, the ratios were similarly strong at 13.42%, 13.42%, 14.63%, and 11.82%, respectively. The capital conservation buffers for the Company and the Bank were 8.02% and 6.63%, well above the 2.50% requirement. This strong capital position provides significant capacity for future loan growth and serves as a buffer against potential credit losses or other unexpected events.

Liquidity remains sound, supported by cash and cash equivalents ($214.3 million) and substantial available borrowing capacity totaling $1.48 billion from the FHLB, Federal Reserve Discount Window, and overnight federal funds lines.

Strategic Initiatives and Outlook

PCB Bancorp's strategy continues to center on its core banking operations, focusing on relationship-based lending and deposit gathering within its target markets. Recent strategic actions include managing its capital structure and enhancing operational efficiency.

A notable strategic element is the ECIP investment and the subsequent option agreement. The $69.1 million Series C Preferred Stock investment from the U.S. Treasury under the ECIP program, received in May 2022, bolstered the company's Tier 1 capital. The January 2025 option agreement provides a conditional path to repurchase this preferred stock, potentially at a discount to its liquidation value, by meeting specific lending thresholds related to underserved communities or achieving a low dividend rate. The earliest this option could potentially be exercised is June 30, 2026. The recognition of the $35.8 million option derivative reflects the potential value of this repurchase opportunity, although its fair value and the ability to meet the conditions remain subject to future performance and market dynamics.

The company also actively manages its common equity through a stock repurchase program, having repurchased 50,676 shares in Q1 2025.

Furthermore, the declaration of a quarterly cash dividend of $0.20 per common share in April 2025, an increase from the prior year, signals management's confidence in the company's profitability and commitment to returning capital to shareholders.

While specific quantitative guidance for future periods was not provided, management's commentary on the ACL provision indicates an expectation of the economic environment over the next four quarters, utilizing macroeconomic forecasts. The increase in the provision reflects a more cautious stance based on slightly worsened GDP and unemployment rate forecasts. The improvement in net interest margin and efficiency ratio in Q1 2025 suggests positive operational momentum heading into the remainder of the year. Continued loan and deposit growth, coupled with disciplined expense management, will be key drivers of future performance.

Risks and Challenges

Investing in PCB Bancorp is subject to several risks and challenges. A significant concern highlighted is the identified material weakness in internal control over financial reporting related to the evaluation of unusual or infrequent derivative contracts. This weakness led management to conclude that disclosure controls and procedures were ineffective as of March 31, 2025. While remediation plans are underway, there is no assurance they will be successful, potentially leading to future material misstatements or issues with SEC reporting, which could negatively impact investor confidence and the stock price.

The conditional nature of the ECIP preferred stock repurchase option presents another risk. The ability to exercise this option and realize a potential discount is contingent upon meeting specific lending and regulatory criteria, which may not be achieved. Changes in the fair value of the related option derivative, recognized in earnings, could also introduce volatility to financial results.

Macroeconomic conditions pose ongoing risks, particularly changes in interest rates and the economic health of the company's primary market areas. While the company's net interest income shows asset sensitivity to rising rates, actual outcomes depend on complex factors like deposit behavior and loan prepayments. Deterioration in economic conditions could lead to increased credit losses, impacting asset quality and profitability, as reflected in the increased provision for credit losses based on updated macroeconomic forecasts.

Competition from a diverse range of financial institutions, including those with potentially more advanced digital capabilities, could pressure loan and deposit pricing, impacting net interest margin and market share. While PCB's community focus is a strength, the lack of detailed, quantifiable technological advantages suggests a potential vulnerability to competitors leveraging technology for efficiency and customer experience.

Finally, regulatory risks are inherent in the banking industry. As the company has exceeded $3 billion in assets, it is now subject to additional consolidated capital requirements, adding complexity and potential compliance costs.

Conclusion

PCB Bancorp's first quarter 2025 results paint a picture of a community-focused bank demonstrating solid financial momentum. Driven by strong net interest income growth and improved efficiency, the company delivered a significant increase in net income available to common shareholders. Its balance sheet shows healthy growth in both loans and deposits, supported by robust capital levels that comfortably exceed regulatory requirements.

The core investment thesis for PCB appears to rest on its established presence in niche markets, its relationship-based banking model, and its strong capital position providing stability and capacity for continued growth. While the competitive landscape, particularly the increasing technological sophistication of some rivals, presents challenges, PCB's strategic emphasis on accessibility and community ties serves as a key differentiator.

Looking ahead, key factors to watch include the successful remediation of the identified material weakness in internal controls, the company's progress towards meeting the conditions for the ECIP preferred stock repurchase, and its ability to manage credit quality in response to evolving macroeconomic conditions. The continued ability to grow its loan and deposit base while maintaining expense discipline will be crucial for sustaining the positive financial trajectory seen in Q1 2025. For investors, PCB offers exposure to a well-capitalized regional bank with a clear market focus, though potential headwinds related to internal controls and competitive dynamics warrant careful consideration.