PCB Bancorp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. PCB Bancorp is the holding company for Pacific City Bank, serving businesses and individuals through branches and loan offices in multiple U.S. markets, with most operations and customers in California.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $16.6 million | $17.2 million in Q1 2019; down 3.4% |
| Net interest margin | 3.85% | 4.22% in Q1 2019 |
| Noninterest income | $2.0 million | $2.4 million in Q1 2019; down 15.9% |
| Provision for loan losses | $2.9 million | $85,000 reversal in Q1 2019 |
| Noninterest expense | $10.6 million | $10.3 million in Q1 2019; up 2.7% |
| Net income / diluted EPS | $3.6 million / $0.23 | $6.6 million / $0.40 in Q1 2019 |
| Total assets | $1.80 billion | $1.75 billion at December 31, 2019 |
| Loans held for investment, gross | $1.45 billion | Nearly unchanged from year-end |
| Deposits | $1.48 billion | Down $1.9 million from year-end |
| Cash and cash equivalents | $188.9 million | $146.2 million at year-end |
| FHLB advances | $80.0 million | $20.0 million at year-end |
Net interest income plus noninterest income was $18.6 million, compared with $19.6 million in Q1 2019. The filing does not provide a standalone net profit margin. Q1 operating cash flow was negative $6.4 million, versus positive $10.0 million in Q1 2019; cash nevertheless rose $42.7 million, primarily reflecting $60.0 million of FHLB advance proceeds. The company reported $356.6 million of additional FHLB borrowing capacity, $39.4 million of available Federal Reserve Discount Window capacity, and $35.0 million of unused federal funds lines.
At March 31, the allowance for loan losses was $16.7 million, or 1.15% of loans held for investment, versus $14.4 million, or 0.99%, at year-end. Nonperforming loans were $4.1 million (0.28% of loans) and nonperforming assets were $4.5 million (0.25% of assets). The Bank’s common equity tier 1 ratio was 15.28%; it remained above the stated well-capitalized threshold.
Material changes and drivers
- Net income fell 45.6% year over year. Management attributed the decline mainly to lower net interest and noninterest income, the higher loan-loss provision, and increased noninterest expense.
- Lower market rates reduced yields on loans and other earning assets. Average yield on interest-earning assets declined to 5.03% from 5.64%; the lower cost of interest-bearing liabilities partly offset the effect.
- The $2.9 million provision included an additional $2.7 million allowance adjustment for increased economic uncertainty related to COVID-19. Net charge-offs were $602,000, compared with net recoveries of $55,000 in Q1 2019.
- Noninterest income declined mainly because loan-sale gains fell to $725,000 from $1.1 million, reflecting lower sale volume and secondary-market premiums.
- Nonperforming loans increased from $2.8 million at year-end to $4.1 million; the filing cites newly placed nonaccrual loans, particularly commercial lines and SBA loans. Other real estate owned was $376,000.
- Total shareholders’ equity declined $2.7 million from year-end, chiefly due to $6.5 million of share repurchases and $1.5 million of declared dividends, partly offset by earnings and higher securities values. The repurchase program was completed in March: 428,474 shares at a weighted-average $15.14 per share.
Outlook, risks and contingencies
- No specific earnings, revenue, margin, or credit-loss guidance is provided. Management warns that Q1 results are not necessarily indicative of full-year results and that COVID-19’s duration and effects remain uncertain.
- Management described liquidity and capital as substantial and said the Bank was supporting customers through payment deferrals and the SBA Paycheck Protection Program (PPP). As of April 24, 2020, it reported 930 PPP loans totaling $104 million and deferrals on 461 loans totaling $347 million.
- COVID-19 risks include borrower stress and delinquencies, falling collateral values, additional provisions and unfunded-commitment reserves, lower asset yields and fee income, deposit volatility, market disruption, and operational or workforce interruptions. Real estate loans represented 81.6% of loans held for investment; management identified $276.4 million in loan segments potentially more directly exposed to pandemic effects.
- The Bank remains subject to a 2019 FDIC and California regulator consent order concerning BSA/AML compliance. Regulators raised concerns about the depth of a required transaction look-back and turnover in the BSA department; management said it was reviewing and addressing them. Continued compliance is subject to regulatory determination and may entail added expense.
- Commitments to extend credit and letters of credit totaled $181.6 million. Management said many commitments may expire undrawn. Litigation is described as ordinary-course; no loss contingency was accrued, and management did not expect a material effect, while noting additional losses are reasonably possible and not estimable.
- After quarter-end, the board declared a $0.10-per-share dividend, payable on or about June 15, 2020 to shareholders of record May 29, 2020.
Key facts for investors to verify
- Whether COVID-related deferrals and PPP lending translate into repayment stress, credit losses, or changes in the allowance in subsequent quarters.
- Trends in nonperforming loans, charge-offs, commercial real estate exposure, and the identified pandemic-sensitive loan segments.
- Net interest margin and funding costs after lower market rates and the increase in FHLB borrowing.
- Deposit stability, liquidity capacity, and capital ratios as commitments are drawn or customer balances change.
- Progress toward resolving the BSA/AML consent-order concerns, including regulator feedback, staffing stability, and any resulting costs or restrictions.
- Subsequent-quarter earnings and cash-flow trends; Q1 operating cash flow was negative despite the increase in cash balances.