PCB Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless stated otherwise. PCB Bancorp is the holding company for Pacific City Bank, which serves businesses and individuals through branches and loan-production offices.
Financial performance and condition
| Metric | Q2 2021 | Prior comparable period or balance-sheet change |
|---|---|---|
| Net income | $9.8 million; diluted EPS $0.64 | $3.4 million; diluted EPS $0.22 in Q2 2020 |
| Net interest income | $19.0 million; net interest margin 3.83% | $15.4 million; margin 3.22% in Q2 2020 |
| Provision for loan losses | $0.9 million reversal | $3.9 million provision in Q2 2020 |
| Noninterest income | $5.2 million | $2.9 million in Q2 2020; loan-sale gains were $4.0 million versus $1.5 million |
| Noninterest expense | $11.1 million | $9.7 million in Q2 2020; salaries and benefits were the main increase |
| Total assets | $2.06 billion | Up 7.1% from December 31, 2020 |
| Loans held for investment | $1.72 billion | Up 8.6% from year-end 2020 |
| Total deposits | $1.80 billion | Up 12.7% from year-end 2020 |
| Cash and cash equivalents | $174.6 million | Down from $194.1 million at year-end 2020 |
| FHLB advances | $10.0 million | Down from $80.0 million at year-end 2020 |
| Shareholders’ equity | $238.9 million | Up 2.2% from year-end 2020 |
For the six months ended June 30, net income was $18.4 million versus $6.9 million in 2020; net interest income was $36.8 million versus $31.9 million. Six-month operating cash flow was $7.2 million, investing cash outflow was $146.8 million, and financing cash inflow was $120.2 million. Cash and cash equivalents decreased by $19.5 million, mainly as lending and securities investment outflows exceeded deposit and other financing inflows.
Q2 return on average assets was 1.96%, return on average equity 16.49%, and efficiency ratio 46.13%. The bank’s June 30 regulatory capital ratios included 14.88% common Tier 1 risk-based capital and 16.13% total risk-based capital; both exceeded the stated well-capitalized thresholds.
Changes, credit quality, and liquidity
- Lower deposit and borrowing costs supported margin expansion: Q2 cost of interest-bearing liabilities fell to 0.40% from 1.17% a year earlier. For the first half, however, interest income declined 3.3%, while interest expense fell 71.3%, lifting net interest income 15.3%.
- Loan-sale gains materially boosted fee income. First-half gains on loan sales were $5.3 million versus $2.2 million. Management attributed the increase to higher SBA loan sale volume and premiums.
- The allowance for loan losses was $24.9 million, or 1.45% of loans held for investment; excluding PPP loans, the ratio was 1.62%. The first-half $2.1 million allowance reversal reflected lower historical-loss and qualitative adjustments amid improving economic conditions, partly offset by commercial-property loan growth.
- Nonperforming loans were $1.4 million, or 0.08% of loans, at June 30, down from $3.2 million at year-end. Nonperforming assets were $1.4 million, or 0.07% of total assets; other real estate owned was zero.
- Commercial real estate represented 58.0% of loans held for investment; real estate loans overall represented 77.5%. SBA PPP loans totaled $181.0 million, with $65.6 million of forgiveness recognized for 1,061 loans. COVID-related modified loans totaled $16.2 million, down from $36.1 million at year-end; management said all were current and accruing.
- Liquidity included $174.6 million of cash and cash equivalents and $601.9 million of available borrowing capacity. Noninterest-bearing demand deposits rose to 44.3% of deposits from 33.7% at year-end. The company repurchased 646,334 shares for $10.3 million during the first half.
Outlook, risks, and unusual items
The filing provides no numerical earnings or other forward guidance. Management said it could not estimate the long-term impact of COVID-19 and expected pandemic-related conditions to continue to affect the business, results, and financial condition negatively, despite local reopening progress. It highlighted borrower performance as deferrals expire, real estate values, credit-loss estimates, interest rates, liquidity, and the company’s real-estate-heavy portfolio as relevant risks.
Subsequent to quarter-end, the board declared a $0.12-per-share quarterly dividend, payable in August 2021. The filing also reports that the BSA/AML consent order was terminated in September 2020. Management said pending litigation was not expected to have a material effect, while noting that additional losses were reasonably possible and not estimable. The company planned to adopt the expected-credit-loss standard on January 1, 2023.
Important facts for investors to verify
- Whether loan-sale gains and the lower provision for credit losses are sustainable contributors to earnings.
- How PPP forgiveness, pandemic-related modifications, and the expiration of borrower relief affect loan balances and credit quality.
- Credit and collateral trends in commercial-property lending, given the portfolio’s real estate concentration.
- Whether rapid deposit growth and the shift toward noninterest-bearing deposits persist, and how liquidity changes as cash is deployed into loans.
- The effect of interest-rate movements and securities valuation changes on net interest margin, earnings, and capital.
- Completion and capital impact of the share-repurchase program, which was authorized through September 7, 2021.