Business context and reporting period
PCB Bancorp, formerly Pacific City Financial Corporation, is a California bank holding company whose subsidiary, Pacific City Bank, serves businesses and individuals through branches in California, New Jersey and New York and loan production offices in multiple states. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; amounts below are in U.S. dollars unless stated otherwise. The company changed its name on July 1, 2019.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $17.7 million | $15.9 million | $34.8 million | $31.2 million |
| Provision for loan losses | $394,000 | $425,000 | $309,000 | $520,000 |
| Noninterest income | $3.1 million | $2.3 million | $5.5 million | $5.6 million |
| Noninterest expense | $11.0 million | $10.9 million | $21.3 million | $20.6 million |
| Net income | $6.6 million | $4.8 million | $13.2 million | $11.0 million |
| Diluted EPS | $0.40 | $0.35 | $0.81 | $0.81 |
| Net interest margin | 4.17% | 4.08% | 4.19% | 4.20% |
- Growth and returns: Q2 net income rose 38.6%; first-half net income rose 19.4%. Q2 return on average assets was 1.52% and return on average equity was 12.01%; first-half figures were 1.55% and 12.22%, respectively.
- Interest income and costs: Q2 net interest income increased 11.4%, with average interest-earning asset yield up to 5.66% from 5.23%. Higher deposit costs partly offset asset growth: cost of average interest-bearing liabilities rose to 2.17% from 1.60%, and net interest spread narrowed to 3.49% from 3.63%. First-half net interest margin was nearly unchanged year over year.
- Balance sheet at June 30: Assets were $1.73 billion, up 1.7% from December 31, 2018. Loans held for investment were $1.396 billion, up 4.2%; deposits were $1.447 billion, up 0.2%. Real estate loans represented 81.6% of loans held for investment.
- Credit: Allowance for loan losses was $13.3 million, or 0.96% of loans held for investment. Nonperforming loans were $1.429 million (0.10% of loans); nonperforming assets were $1.824 million (0.11% of assets), including $395,000 of other real estate owned. Net charge-offs were $203,000 in Q2 and $148,000 in the first half.
- Cash flow and liquidity: First-half operating cash flow was $17.5 million, versus cash used of $511,000 in the prior-year period. Investing activities used $51.9 million and financing activities provided $5.5 million. Cash and cash equivalents were $133.3 million at quarter end, down $29.0 million since year-end. FHLB advances totaled $35 million; the company reported $394.4 million of additional FHLB capacity, $41.8 million of Federal Reserve Discount Window capacity and $35 million of unused federal funds lines.
- Capital and shareholder returns: Shareholders’ equity was $223.4 million. The Bank’s common equity Tier 1 ratio was 16.07% and total capital ratio was 17.05%; management said the Bank met applicable capital requirements. The company repurchased 57,551 shares for $974,000 under a $6.5 million authorization and declared a $0.06 quarterly dividend.
- Debt and obligations: FHLB advances were the disclosed borrowings; the filing reports no outstanding borrowing on the terminated $25 million credit line. Operating lease liabilities were $11.1 million following adoption of the new lease standard.
Material changes versus comparable periods
- Q2 earnings growth reflected higher net interest income and noninterest income and a lower loan-loss provision, partly offset by higher expenses. First-half earnings growth came mainly from higher net interest income and lower provision, while noninterest income declined 3.1%.
- Q2 gain on sale of loans increased 83.1% to $1.9 million; for the first half it declined 4.4% to $3.0 million. Higher deposit interest costs were a significant offset to revenue growth.
- Compared with December 31, 2018, cash and cash equivalents fell from $162.3 million to $133.3 million, while loans grew and deposits were nearly flat. Nonperforming assets rose from $1.061 million to $1.824 million.
- Shareholders’ equity increased 6.2% from year-end, reflecting earnings and improved unrealized gains on available-for-sale securities, partly offset by dividends and share repurchases.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue, margin or growth guidance. Management notes that interim results are not necessarily indicative of full-year results.
- Regulatory consent order: On April 30, 2019, the FDIC and California regulator issued a consent order concerning the Bank’s BSA/AML program, following prior findings about compliance leadership and resourcing. Requirements include strengthened oversight, staffing, risk assessment, customer due diligence, monitoring, training, independent testing and periodic regulatory reporting. The Bank reported completing its staffing assessment and 2018 transaction look-back and submitting required reports. Regulatory satisfaction and successful compliance remain uncertain; management expects related expenses but does not expect a material financial impact.
- Credit and concentration risks: The loan portfolio is heavily concentrated in real estate, and management identifies borrower condition, collateral values, construction performance and local economic conditions as potential credit risks. The allowance is based on estimates and may change. The expected-credit-loss accounting standard was under implementation; management anticipated a potentially material transition adjustment, with a possible effective-date delay for smaller reporting companies still tentative at the time of filing.
- Interest-rate risk: The filing’s model projected net interest income sensitivity of +21.8% for an immediate +200-basis-point shock and −28.0% for a −200-basis-point shock as of June 30, 2019. These are modeled sensitivities, not forecasts, and exclude management actions.
- Commitments and contingencies: Off-balance-sheet credit commitments and letters of credit totaled $157.3 million. Management said many commitments may expire unused. The company reported ordinary-course litigation, no accrued legal loss contingency, and said additional losses could not be reliably estimated; management did not expect the matters to be material.
- Other notable items include adoption of lease accounting on January 1, 2019, adding $10.1 million of operating lease assets and $11.1 million of liabilities at quarter end, and a $53,000 opening retained-earnings adjustment.
Important facts for investors to verify
- Track whether the Bank meets all milestones and obtains regulatory acceptance under the BSA/AML consent order, including the related costs and any restrictions on new offices, products or services.
- Assess credit quality trends, particularly the increase in nonperforming assets, real-estate concentration, and adequacy of the allowance as loans continue to grow.
- Monitor deposit pricing, deposit mix and renewal maturities: time deposits totaled $775.6 million, with $753.6 million contractually due within one year.
- Evaluate whether loan growth can sustain earnings as funding costs rise and the net interest spread narrows.
- Confirm the timing and financial effect of expected-credit-loss accounting adoption; the filing describes the potential impact as possibly material but does not quantify it.