PCB BANCORP (Pacific City Financial Corporation) — 2018 Form 10-K
Business context and reporting period. The registrant, Pacific City Financial Corporation, is the holding company for Pacific City Bank and trades on Nasdaq under ticker PCB. It provides commercial and consumer banking, with a focus on small and middle-market businesses and Korean-American customers. This is the fiscal year ended December 31, 2018, with comparative annual results; the filing also reports unaudited fourth-quarter results.
Financial performance and condition
- Profitability: 2018 net income was $24.3 million, up 48.1% from $16.4 million; diluted EPS was $1.65 versus $1.21. Income before tax rose 10.9% to $34.7 million. Return on average assets was 1.53% and return on average equity was 14.26%.
- Revenue and margins: Net interest income increased 19.2% to $65.7 million. Interest income rose 28.2% to $83.7 million, while interest expense rose 77.8% to $18.0 million. Net interest margin was 4.23%, little changed from 4.22%; net interest spread declined to 3.73% from 3.85%. Noninterest income fell 24.8% to $10.5 million, principally due to lower SBA loan-sale gains. Noninterest expense rose 12.1% to $40.2 million; the efficiency ratio was 52.79% versus 51.97%.
- Taxes and unusual items: Income tax expense fell to $10.4 million from $14.9 million, and the effective tax rate declined to 30.1% from 47.7%. The 2017 rate included a $1.6 million deferred-tax-asset revaluation following federal tax reform. 2018 other expense included a $577,000 reimbursement to the SBA for a loan guarantee on a 2007-originated loan later deemed ineligible.
- Balance sheet and capital: Total assets grew 17.7% to $1.697 billion. Loans held-for-investment increased 12.5% to $1.339 billion; deposits increased 15.4% to $1.444 billion. Shareholders’ equity rose 47.9% to $210.3 million, reflecting net income and $45.0 million of net IPO proceeds. The Bank’s CET1 risk-based capital ratio was 16.19%, total capital ratio 17.21%, and Tier 1 leverage ratio 12.53%; it exceeded well-capitalized thresholds.
- Funding and liquidity: Cash and cash equivalents were $162.3 million, or 9.6% of assets. FHLB advances were $30.0 million, down from $40.0 million. Additional stated capacity included $386.0 million from FHLB, $45.2 million at the Federal Reserve Discount Window, and $60.0 million in unused unsecured federal funds lines. The loans-to-deposits ratio was 93.12%. Core deposits were 77.6% of deposits; wholesale deposits totaled $142.5 million, or 9.9%.
- Cash flow: Operating activities provided $35.1 million; investing activities used $172.5 million, largely reflecting loan growth; financing activities provided $226.1 million, including deposit growth and IPO proceeds. Cash increased by $88.6 million during the year.
- Asset quality: Nonperforming loans were $1.1 million, or 0.08% of loans, versus $3.2 million, or 0.27%, a year earlier. Nonperforming assets were 0.06% of assets. The allowance was 0.98% of loans versus 1.03%; net charge-offs were 0.02% of average loans.
Fourth quarter: Net interest income was $17.9 million and net income was $6.7 million, compared with $14.9 million and $2.3 million, respectively, in Q4 2017. Diluted EPS was $0.41 versus $0.17.
Material changes versus 2017
- Growth in average interest-earning assets and higher loan yields drove higher net interest income, but deposit competition and rising rates increased funding costs. Management noted margin pressure from deposit competition during the second and third quarters.
- SBA loan-sale gains declined: gain on sale of loans was $5.6 million versus $9.0 million, including SBA loan-sale gains of $5.3 million versus $8.9 million. SBA originations (total commitment basis) fell to $117.1 million from $182.5 million.
- Loans, deposits, and assets expanded; the August 2018 IPO raised $45.0 million net, strengthening capital and reducing the CRE concentration ratio from 355.1% to 253.6% of risk-based capital.
- Noninterest expense increased, including public-company and listing-related professional costs, growth-related staffing and occupancy, and higher marketing and operating expenses.
- Nonperforming loans and troubled debt restructurings declined. The allowance-to-loans ratio also declined modestly.
Outlook, risks, and contingencies
- The filing provides no quantitative earnings or growth guidance. Management describes continued organic loan and deposit growth as its strategy, while noting the need to maintain underwriting discipline, funding access, capital, and asset quality.
- Credit exposure is concentrated in real estate: 81.6% of held-for-investment loans were real estate loans. CRE concentration, regional economic weakness, falling property values, and the relatively short seasoning of much of the loan portfolio are key risks. Residential loans were described as predominantly non-qualified mortgages, which may be less liquid.
- Interest-rate risk is significant. A modeled parallel 100-basis-point increase was associated with an 11.0% increase in net interest income; a 100-basis-point decrease with a 13.7% decline. These are model estimates, not forecasts.
- The Bank entered an informal agreement with the FDIC and California DBO in January 2018 requiring improvements to Bank Secrecy Act/anti-money-laundering processes, training, and monitoring of high-rate deposits. Failure to comply could restrict expansion. Management said it did not expect the agreement to change strategy.
- CECL was scheduled to take effect for the Company in fiscal 2020. Management was implementing the standard and said adoption could result in a potentially material one-time adjustment to the allowance. The Company also adopted the new lease standard in Q1 2019, recognizing approximately $9.6 million of right-of-use assets and $10.6 million of lease liabilities.
- Commitments to extend credit and letters of credit totaled $130.9 million at year-end. The Company reported no accrued loss contingencies for legal claims; management did not expect pending litigation to materially affect the financial statements, but could not estimate the range of possible additional losses.
- Other disclosed risks include deposit repricing and time-deposit maturities, dependence on SBA programs and loan-sale premiums, cyber and operational risks, competition, regulatory changes, and exposure to earthquakes, wildfire, and other natural disasters. The auditor issued an unqualified opinion on the consolidated financial statements. Management’s internal-control-over-financial-reporting assessment was omitted under the transition relief for newly public companies.
Important facts for investors to verify
- Whether deposit costs continue rising faster than loan yields, and how that affects net interest margin and earnings.
- Whether SBA loan production, loan-sale volumes, and related gains recover, given their material contribution to noninterest income.
- Loan performance as the portfolio seasons, including real-estate concentrations, non-qualified residential mortgages, and allowance adequacy.
- Progress and any financial or operational effects from the informal BSA/AML agreement and CECL implementation.
- Deposit stability and refinancing needs, particularly the significant time-deposit base and near-term contractual maturities; assess available borrowing capacity alongside funding costs.
- The terms and sustainability of dividends: the filing reports $0.03 per share quarterly in 2018 and a subsequent declaration of $0.05 per share for Q1 2019, subject to regulatory and capital constraints.