PCB Bancorp — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with 2018. PCB Bancorp is a California bank holding company whose subsidiary, Pacific City Bank, serves small and middle-market businesses and individuals through branches and loan production offices. The company changed its name from Pacific City Financial Corporation in July 2019.
Financial performance and position
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total assets | $1.746 billion | $1.697 billion | Up 2.9% |
| Loans held for investment | $1.451 billion | $1.339 billion | Up 8.4% |
| Total deposits | $1.479 billion | $1.444 billion | Up 2.5% |
| Net interest income | $69.0 million | $65.7 million | Up 5.0% |
| Net interest margin | 4.11% | 4.23% | Down 12 basis points |
| Noninterest income | $11.9 million | $10.5 million | Up 13.5% |
| Noninterest expense | $42.3 million | $40.2 million | Up 5.2% |
| Provision for loan losses | $4.2 million | $1.2 million | Higher charge-offs and loan growth |
| Net income | $24.1 million | $24.3 million | Down 0.8% |
| Diluted earnings per share | $1.49 | $1.65 | Down 9.7% |
| Operating cash flow | $30.1 million | $30.7 million | Cash and cash equivalents fell $16.0 million during 2019 |
Loan growth and higher loan yields supported net interest income, but funding costs rose: interest expense increased 33.2%, while the average cost of interest-bearing liabilities increased to 2.09% from 1.65%. The average cost of deposits was 1.62%, compared with 1.27% in 2018. Reported return on average assets was 1.40% (1.53% in 2018); return on average equity was 10.88% (14.26% in 2018); and the efficiency ratio was 52.30% (52.79% in 2018).
Cash and cash equivalents were $146.2 million at year-end, or 8.4% of assets. FHLB advances totaled $20.0 million, down from $30.0 million; the company reported $404.8 million of additional FHLB borrowing capacity, $35.0 million of unused unsecured federal funds lines and $37.9 million of unused Federal Reserve borrowing capacity. Shareholders’ equity was $226.8 million, up 7.9%. The Bank’s year-end capital ratios included 15.68% common Tier 1 risk-based capital, 16.71% total risk-based capital and 13.06% Tier 1 leverage; it met “well-capitalized” thresholds.
Material changes and notable items
- Asset quality weakened from the prior year: net charge-offs rose to $3.0 million from $0.3 million, and the allowance for loan losses increased to $14.4 million from $13.2 million. The allowance was 0.99% of loans, versus 0.98%.
- A $2.5 million charge-off on a commercial line of credit was a major contributor to 2019 credit costs. Nonperforming loans increased to $2.8 million, or 0.19% of loans, from $1.1 million, or 0.08%; nonperforming assets were 0.16% of assets.
- Commercial real estate remained a major concentration: real estate loans were 81.9% of loans held for investment. CRE loans under the regulatory concentration definition equaled 243.6% of risk-based capital, down from 253.6% in 2018.
- Noninterest income benefited from $6.0 million of loan-sale gains, including $5.9 million on SBA loans, and a $0.8 million gain on sale of securities. The company sold $32.8 million of available-for-sale securities.
- Deposits included $92.4 million of brokered deposits and $90.0 million from the California State Treasurer. Core deposits represented 74.2% of total deposits; wholesale deposits were $182.4 million, or 12.3%.
- Dividends declared increased to $0.25 per share from $0.12. The company completed a $6.5 million share repurchase, retiring 396,715 shares. It announced another $6.5 million repurchase authorization for 2020–2021 and declared a $0.10-per-share first-quarter 2020 dividend.
- Operating cash flow was $30.1 million; investing activities used $61.9 million and financing activities provided $15.7 million. The resulting decrease in cash and cash equivalents was $16.0 million.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue or growth guidance. Management described continued organic loan and deposit growth and expansion of commercial and SBA lending, while noting competition, a declining-rate environment and regulatory demands. The company increased the fixed-rate share of loans to 43.4% from 34.4% to adjust its interest-rate exposure. Its modeled net interest income sensitivity at December 31, 2019 was positive 10.4% for an immediate 100-basis-point rate increase and negative 11.7% for a 100-basis-point decrease; these are model estimates, not forecasts.
Regulatory matter: In April 2019, the Bank consented to an FDIC and California regulator order concerning BSA/AML compliance. Requirements include strengthened controls, monitoring, staffing, training, independent testing and regulatory reporting; prior non-objection is required for certain expansion and business changes. Regulators raised concerns about the depth of a transaction look-back and turnover in the BSA department. Management said it was addressing these matters, but satisfactory progress remained uncertain and was subject to regulators’ judgment. The Bank expected related expenses but did not expect a material financial impact.
Other material risks include the concentration in commercial and real estate lending; borrower and collateral exposure to regional economic conditions and property values; deposit competition and reliance on certain large or wholesale funding sources; interest-rate and liquidity risk; reliance on SBA loan sales and guarantees; operational, cybersecurity and third-party risks; and natural disasters affecting California. The company had $175.2 million of commitments to extend credit and letters of credit at year-end. It reported $8,000 of accrued legal contingencies and said additional losses were reasonably possible but not estimable; management did not expect litigation matters to materially affect the financial statements.
The company adopted lease accounting in 2019, recognizing $9.0 million of operating lease assets and $10.0 million of lease liabilities at year-end. CECL implementation was delayed for the company until January 2023. The independent auditor gave an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Track the BSA/AML consent order, regulator feedback, staffing stability, look-back findings and any limits on new branches, products or delivery channels.
- Review subsequent credit performance, especially the charged-off commercial line, rising past-due balances, nonperforming loans, TDRs and allowance adequacy.
- Assess CRE and broader real-estate concentration, including collateral values, borrower repayment capacity and concentration ratios.
- Monitor deposit mix, deposit pricing, brokered and state deposits, large-customer concentrations, and available secured borrowing capacity.
- Verify whether loan growth and SBA sale gains can offset rising funding costs and whether margins remain pressured as rates and competition change.
- Confirm the company’s ability to sustain dividends and repurchases within bank dividend restrictions and regulatory capital requirements.