PCB Bancorp (Pacific City Financial Corporation) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing identifies the registrant as Pacific City Financial Corporation, parent of Pacific City Bank, which serves small and middle-market businesses and individuals. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $15.9 | $13.4 | $31.2 | $25.9 |
| Provision (reversal) for loan losses | $0.4 | ($0.3) | $0.5 | ($0.5) |
| Noninterest income | $2.3 | $3.6 | $5.6 | $7.1 |
| Noninterest expense | $10.9 | $8.8 | $20.6 | $17.3 |
| Net income | $4.8 | $4.9 | $11.0 | $9.3 |
| Diluted EPS | $0.35 | $0.36 | $0.81 | $0.68 |
| Net interest margin | 4.08% | 4.21% | 4.20% | 4.18% |
| Efficiency ratio | 60.26% | 51.84% | 55.88% | 52.60% |
- Q2 net income decreased 2.0% year over year; management attributed the decline mainly to higher expenses and loan-loss provision and lower noninterest income, partly offset by higher net interest income and lower taxes.
- Six-month net income increased 19.1%, primarily on stronger net interest income and lower income taxes. The effective tax rate was 29.9%, versus 42.4%, mainly reflecting the federal corporate tax-rate reduction.
- Q2 net interest income rose 18.7%, but margin contracted 13 basis points as funding costs rose and the company held more lower-yielding liquid assets. Six-month margin was nearly flat year over year.
- Loan-sale gains fell to $1.0 million in Q2 from $2.4 million. A $16.7 million SBA loan sale commitment had not settled at quarter-end but settled in July.
Financial position, cash flow and liquidity
- At June 30, assets were $1.62 billion, up 12.3% from year-end 2017; loans held for investment, net of deferred costs, were $1.25 billion, up 5.5%; deposits were $1.43 billion, up 14.1%.
- Cash and cash equivalents were $168.6 million, versus $73.7 million at year-end. First-half operating cash flow was $1.7 million, investing cash outflow $72.0 million and financing cash inflow $165.2 million. Deposit growth was the main financing source.
- FHLB borrowings were $30.0 million, down from $40.0 million at year-end. Available additional FHLB borrowing capacity was $352.4 million; unused Federal Reserve discount-window capacity was $52.1 million, and unused unsecured federal-funds lines totaled about $60 million.
- Time deposits were $797.1 million, or 55.8% of deposits. The company reported a deposit promotion that raised $122.7 million at a weighted-average rate of 2.21%. Brokered time deposits were $52.5 million.
- Shareholders’ equity was $151.4 million. Bank capital ratios exceeded regulatory minimums; the bank’s common Tier 1 ratio was 12.4% and total capital ratio 13.4%.
- The loan portfolio was concentrated in real estate: $1.03 billion, or 82.4% of loans held for investment. The allowance for loan losses was $12.6 million, or 1.01% of loans.
- Nonperforming loans were $2.0 million, down from $3.2 million at year-end; nonperforming assets were also $2.0 million, versus $3.3 million. No loans were 90 days past due and still accruing.
Material changes, outlook and risks
- Expense growth and weaker loan-sale gains pressured quarterly earnings. Noninterest expense rose 24.4% in Q2; professional fees increased with S-1 preparation and Nasdaq listing work.
- Q2 included a one-time $577,000 SBA reimbursement and related receivable write-off. The SBA determined a guarantee on a 2007 loan was ineligible.
- The company reported no specific earnings guidance. Management said results for the first half are not necessarily indicative of full-year results and expects to meet contractual obligations through cash, earnings, loan and securities repayments, deposits and borrowing facilities.
- Management cited sensitivity to interest rates, deposit pricing competition, credit and real-estate conditions, loan concentrations, growth execution, regulatory requirements, cybersecurity and liquidity. Its modeled interest-rate scenarios projected NII up 22.3% for an immediate +200 basis-point shock and down 13.8% for a -100 basis-point shock; these are modeled sensitivities, not forecasts.
- Off-balance-sheet credit commitments and letters of credit totaled $116.5 million. Litigation accruals were about $100,000; management did not expect pending matters to materially affect the statements, but said additional losses were reasonably possible and could not be estimated.
- After quarter-end, the company completed an IPO on August 14, raising about $43.2 million net, and received another $2.3 million net from a partial underwriters’ option exercise on September 5. Shares began trading on Nasdaq as “PCB.” These proceeds are not reflected in the June 30 balance sheet.
- The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting. The cover page checked “No” for filing all required reports during the preceding 12 months.
Important facts for investors to verify
- Confirm the reason for the cover-page “No” response regarding prior required filings, in light of the company’s recent IPO and public-company transition.
- Track deposit mix, promotional and time-deposit renewal costs, and whether deposit-cost increases continue to outpace asset yields.
- Assess credit performance and allowance adequacy, particularly given real-estate concentration and the first-half increase in provision and net charge-offs.
- Verify the timing and earnings impact of the $16.7 million SBA loan sale settled in July, and whether loan-sale gains recover.
- Review the IPO proceeds’ deployment, post-offering share count and resulting capital and per-share effects.