PCB Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. PCB Bancorp is a bank holding company whose subsidiary, Pacific City Bank, serves businesses and individuals through branches and loan production offices. Financial amounts below are in U.S. dollars; “m” means million.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Net income | $8.56m; diluted EPS $0.55 | Net income rose 139.6% from $3.57m; diluted EPS was $0.23 in Q1 2020 |
| Net interest income | $17.82m | Up 7.6% from $16.57m |
| Interest income / expense | $19.26m / $1.44m | Interest income fell 11.1%; expense fell 71.8% year over year |
| Net interest margin / spread | 3.70% / 3.48% | Margin was 3.85% and spread 3.26% in Q1 2020 |
| Noninterest income / expense | $2.86m / $9.67m | Income up 41.0%; expense down 8.5% year over year |
| Assets / loans held for investment | $2.05bn / $1.69bn | Assets up 6.6% and loans up 6.5% from December 31, 2020 |
| Deposits / FHLB advances | $1.75bn / $40.0m | Deposits up 10.0%; advances down from $80.0m at year-end |
| Cash and cash equivalents | $211.8m | Up from $194.1m at December 31, 2020 |
| Shareholders’ equity | $240.3m | Up 2.8% from $233.8m at year-end |
Profitability and capital: Annualized return on average assets was 1.75% and return on average equity was 14.66%; the efficiency ratio was 46.76%. The Bank’s common equity Tier 1 ratio was 15.62%, total capital ratio 16.88%, and leverage ratio 11.81%, each above the stated well-capitalized thresholds.
Cash flow: Operating activities provided $8.8m; investing activities used $109.0m, chiefly reflecting $101.5m of net loan growth; financing activities provided $117.8m, primarily from $158.9m of deposit growth, partly offset by $40.0m of FHLB repayments. Cash increased $17.7m during the quarter.
Liquidity and debt: Management reported cash equal to 10.3% of assets and $540.1m of available borrowing capacity. This included $440.7m of additional FHLB capacity, $65.0m of unused federal funds lines and $34.4m at the Federal Reserve Discount Window. These resources are subject to collateral and availability conditions.
Material changes and operating drivers
- Earnings increased substantially as lower deposit funding costs and a $1.15m reversal of loan-loss provision supported results. Q1 2020 included a $2.90m provision.
- Net interest income benefited from lower funding costs and growth in average interest-earning assets, partly offset by lower asset yields. Average yield on interest-earning assets declined to 4.00% from 5.03%; cost of interest-bearing liabilities declined to 0.52% from 1.77%.
- Noninterest income growth reflected higher loan servicing income and gains on loan sales. Gain on sale of loans was $1.32m, versus $0.73m a year earlier.
- Noninterest expense declined, including lower professional fees following termination of the Bank’s BSA/AML consent order in September 2020. The order was terminated after regulators determined its requirements had been satisfied.
- Noninterest-bearing demand deposits increased $177.7m from year-end, while total interest-bearing deposits decreased $18.8m. The filing attributes deposit growth in part to customers associated with SBA PPP and Economic Injury Disaster Loan activity.
- SBA PPP loans totaled $218.7m, or 13.0% of held-for-investment loans, at March 31, 2021; the Company funded $104.3m during the quarter and had received $23.7m in forgiveness as of quarter-end. The loans carry a 1% contractual rate and are SBA-guaranteed.
Credit quality, outlook and risks
- The allowance for loan losses was $25.5m, or 1.51% of held-for-investment loans, down from $26.5m and 1.67% at year-end. Excluding PPP loans, allowance coverage was 1.74%. Management attributed the reversal and lower coverage ratio to improved historical loss factors and qualitative adjustments reflecting economic conditions.
- Nonperforming loans were $1.46m, or 0.09% of held-for-investment loans, versus $3.16m and 0.20% at year-end. Nonperforming assets were $3.80m, including $2.34m of other real estate owned (up from $1.40m).
- COVID-19-modified loans totaled $19.8m, down from $36.1m at year-end. All were current and accruing at March 31; $16.4m were classified special mention and $1.2m substandard. Management said these loans remain subject to ongoing monitoring. The filing cautions that the pandemic’s longer-term effects cannot yet be estimated.
- Loan exposure is concentrated in real estate: real estate loans represented 74.1% of held-for-investment loans. Risks cited include economic conditions and pandemic impacts, borrower performance as deferrals expire, real estate values, credit-loss estimates, interest rates, liquidity, competition, cybersecurity and regulatory compliance.
- The Company provided no specific earnings or financial guidance. Management stated it could not estimate the pandemic’s long-term impact and expected pandemic-related conditions to affect business and financial results negatively.
- Interest-rate modeling at quarter-end projected that an immediate 100-basis-point rate increase would raise net interest income by 11.8% and economic value of equity by 7.9%, before management actions. These are model estimates, not forecasts of realized results.
- Management said it expected to meet contractual obligations and maintain adequate cash through earnings, loan and securities repayments and maturities, deposit gathering and borrowing sources. The filing reported no material change to the risk factors in the 2020 Form 10-K.
- Management considered pending ordinary-course litigation not material, but said additional losses are reasonably possible and the range cannot currently be estimated. No legal loss contingency was accrued at quarter-end.
Subsequent events and investor items to verify
- On April 8, 2021, the Board authorized repurchases of up to 775,000 shares (5% of then-outstanding common stock) through September 7, 2021; no shares were repurchased in Q1.
- On April 22, 2021, the Board declared a $0.10 per-share quarterly dividend, payable on or about May 14, 2021 to shareholders of record May 7.
- Verify the sustainability of earnings growth, particularly the effects of the loan-loss reversal, PPP fee recognition and loan-sale gains, as well as the outlook for net interest margin.
- Monitor PPP forgiveness and repayment, modified-loan performance as relief terms expire, real estate concentrations, allowance adequacy and the increase in other real estate owned.
- Assess deposit mix and funding costs, the use and availability of borrowing capacity, interest-rate sensitivity assumptions, and the execution and funding of the new repurchase authorization.