PCB Bancorp — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. PCB Bancorp is the holding company for Pacific City Bank, which serves small and middle-market businesses and individuals through branches and loan production offices. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2020 | Comparable period / balance |
|---|---|---|
| Interest income | $19.6 million | $23.7 million in Q3 2019 |
| Net interest income | $16.9 million | $17.5 million in Q3 2019 |
| Provision for loan losses | $4.3 million | $0.1 million reversal in Q3 2019 |
| Noninterest income | $2.3 million | $2.8 million in Q3 2019 |
| Noninterest expense | $9.9 million | $10.8 million in Q3 2019 |
| Net income / diluted EPS | $3.4 million / $0.22 | $6.8 million / $0.42 in Q3 2019 |
| Net interest margin | 3.43% | 4.11% in Q3 2019 |
- Nine-month results: Net interest income was $48.8 million versus $52.4 million in 2019; provision for loan losses was $11.1 million versus $0.2 million; net income was $10.4 million versus $20.0 million. Diluted EPS was $0.67 versus $1.23. Net interest margin was 3.49% versus 4.16%.
- Balance sheet at September 30: Assets were $2.02 billion, up 15.7% from December 31, 2019. Loans held for investment were $1.58 billion, up 8.8%; deposits were $1.65 billion, up 11.3%; shareholders’ equity was $229.3 million, up 1.1%.
- Credit: Allowance for loan losses was $24.5 million, or 1.55% of loans held for investment (1.70% excluding PPP loans), compared with $14.4 million, or 0.99%, at year-end 2019. Nonperforming assets were $4.0 million, or 0.20% of assets. Nine-month net charge-offs were $0.9 million.
- Liquidity and borrowings: Cash and cash equivalents were $257.4 million, or 12.7% of assets. FHLB advances were $130.0 million versus $20.0 million at year-end. The company reported $419.9 million in available borrowing capacity; this includes available FHLB, Federal Reserve and federal funds lines.
- Cash flows, nine months: Operating activities used $19.1 million; investing activities used $137.1 million; financing activities provided $267.3 million. Cash and cash equivalents increased $111.2 million to $257.4 million, primarily alongside deposit growth and borrowing.
- Capital: Pacific City Bank’s common equity Tier 1 ratio was 15.34%, total capital ratio 16.60%, and Tier 1 leverage ratio 11.21%, all above applicable well-capitalized thresholds.
Material changes versus comparable periods
- Q3 net income declined 49.2% year over year. Lower yields on loans, securities and cash reduced interest income; reduced deposit funding costs partially offset the decline. Q3 net interest margin fell 68 basis points to 3.43%.
- COVID-19-related credit provisioning materially increased: $4.3 million in Q3 and $11.1 million for the first nine months, compared with a small reversal and provision, respectively, in 2019.
- Loan growth included $136.4 million of SBA Paycheck Protection Program loans across 1,614 loans. Total loans under COVID-19 modifications fell to $171.6 million at September 30 from $484.0 million at June 30; all were current and accruing at quarter-end, with remaining modification terms of four months or less.
- Deposits grew $167.8 million from year-end, including a $216.0 million increase in noninterest-bearing demand deposits, while interest-bearing deposits declined $48.2 million.
- The allowance increased, while nonperforming assets rose from $2.8 million at year-end 2019 to $4.0 million. The allowance’s coverage of nonperforming loans was 683%.
- The company transferred $18.8 million of held-to-maturity securities to available-for-sale in Q2 for liquidity management. The transfer produced a $787,000 pretax increase in accumulated other comprehensive income and limits the company’s ability to assert intent to hold securities to maturity for up to two years.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said it could not estimate the pandemic’s long-term impact and expected COVID-19 conditions to continue negatively affecting business, results and financial condition.
- Key risks include borrower performance as payment deferrals expire, real estate collateral values, commercial borrower health, credit losses and adequacy of reserves, low interest rates and margin pressure, deposit flows, liquidity, and possible disruption to operations and customer service. The company also highlighted cybersecurity risk and uncertainty around pandemic duration and economic recovery.
- The company reported $171.6 million in COVID-19-modified loans and $136.4 million in PPP loans at quarter-end. PPP loans carried the SBA guarantee; the company recorded no allowance for those loans.
- The Bank’s BSA/AML consent order was terminated on September 30, 2020 after regulators determined its requirements had been met.
- The company reported no accrued loss contingencies for legal claims; management did not expect litigation amounts to be material, but said additional losses were reasonably possible and could not be estimated.
- A quarterly dividend of $0.10 per share was declared and paid during Q3. A further $0.10 dividend was declared October 22, 2020 for payment in November.
- The company planned to adopt the CECL expected-credit-loss standard on January 1, 2023. Management noted that adoption could increase the allowance and reduce income; the effect was not quantified.
Key facts for investors to verify
- Whether borrowers returning from deferrals remain current and whether further modifications or credit deterioration emerge.
- How COVID-related economic conditions affect future provisions, nonperforming assets, charge-offs and collateral values.
- Whether deposit growth and available borrowing capacity remain sufficient, and the cost and maturity profile of FHLB advances.
- Whether PPP fee amortization, loan yields and funding costs support net interest margin as rates and balances change.
- The ongoing effects of the securities reclassification, including the stated restriction on future held-to-maturity assertions.
- Any material updates to litigation exposure, regulatory matters or the expected impact of CECL adoption.