PCB Bancorp — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. PCB Bancorp is a bank holding company operating Pacific City Bank, serving businesses and individuals through branches and loan production offices. The company changed its name from Pacific City Financial Corporation in July 2019. Dollar amounts below are in U.S. dollars; financial figures are rounded.
Financial performance and condition
- Q3 earnings: Net income was $6.8 million, up 3.7% from $6.5 million a year earlier. Diluted EPS was $0.42, down from $0.44.
- Nine-month earnings: Net income was $20.0 million, up 13.6% from $17.6 million. Diluted EPS was $1.23, compared with $1.25.
- Interest income and margins: Q3 net interest income rose 4.9% to $17.5 million; for nine months it rose 9.4% to $52.4 million. Net interest margin was 4.11% for Q3 and 4.16% for nine months, versus 4.17% and 4.19%, respectively, in 2018. Deposit costs increased faster than asset yields, compressing spread and margin.
- Other income and expenses: Q3 noninterest income rose 8.6% to $2.8 million, while noninterest expense rose 13.2% to $10.8 million. For nine months, noninterest income was $8.3 million (up 0.6%) and noninterest expense was $32.1 million (up 6.5%). The Q3 efficiency ratio increased to 53.01% from 49.34%.
- Assets, loans and deposits: Total assets were $1.70 billion, nearly unchanged from year-end 2018. Loans held-for-investment grew 3.8% to $1.39 billion; 82% were real estate loans. Deposits declined 0.8% to $1.43 billion, as lower time deposits more than offset growth in demand and savings/NOW/money-market accounts.
- Credit quality: The allowance for loan losses was $13.1 million, or 0.94% of loans, versus 0.98% at year-end. Nonperforming loans rose to $1.84 million from $1.06 million; the ratio to loans increased to 0.13% from 0.08%. Q3 included a $102,000 provision reversal; nine-month provision was $207,000.
- Cash flow and liquidity: Nine-month operating cash flow was $25.8 million, versus $16.5 million in 2018. Investing used $36.4 million and financing used $29.8 million; cash and cash equivalents fell $40.4 million to $121.9 million. The bank had $20.0 million of FHLB advances, $411.6 million of additional FHLB borrowing capacity, $43.1 million of Federal Reserve borrowing capacity and $35.0 million in unused federal-funds lines.
- Capital and shareholder returns: Shareholders’ equity was $224.6 million, up from $210.3 million at year-end. The Bank’s total risk-based capital ratio was 17.08%, above the 10.0% well-capitalized threshold. Through September, the company repurchased $6.1 million of stock and declared $0.17 per share in dividends.
Material changes versus comparable periods
- Loan growth and higher loan yields supported interest income, but increased deposit costs weighed on margins. Q3 average interest-bearing deposit cost rose to 2.13% from 1.72%.
- Higher salaries and benefits, occupancy costs and professional fees contributed to expense growth; management cited staffing and public-company and BSA/AML compliance costs.
- Nonaccrual loans increased, primarily following loans placed on nonaccrual status during the first nine months. The allowance balance was broadly stable.
- Available-for-sale securities had a $3.3 million fair-value increase before tax during the first nine months; accumulated other comprehensive income ended at $0.7 million, compared with a $1.6 million loss at year-end 2018.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management says results for the nine-month period are not necessarily indicative of full-year results.
- BSA/AML consent order: In April 2019, the FDIC and California regulator issued an order requiring improvements to the Bank’s compliance program, oversight, staffing, monitoring, training and reporting. The Bank reported completing its staffing assessment and transaction look-back and enhancing risk assessment and customer due diligence. Regulators determine whether progress is acceptable; the order remains in effect until modified or terminated. Management expects related costs but does not expect a material financial impact.
- Credit and concentration risks: Real estate loans comprise 82% of the loan portfolio. The filing also identifies economic conditions, property values, borrower health, interest rates, deposit competition, regulatory compliance and cybersecurity among relevant risks.
- Commitments: Off-balance-sheet credit commitments totaled $174.8 million, up from $130.9 million at year-end; amounts drawn may differ, and many commitments may expire unused.
- Other items: Adoption of lease accounting added $9.6 million in operating lease assets and $10.6 million in liabilities. Litigation accruals were $9,000; additional losses are possible but not presently estimable, and management does not expect material impact.
- Subsequent events: The company completed its $6.5 million repurchase program on October 24, 2019, having purchased 396,715 shares. On October 31, it declared a quarterly dividend of $0.08 per share.
Important facts for investors to verify
- Progress toward satisfying the BSA/AML consent order, any regulator findings, and the resulting compliance costs or operating restrictions.
- Whether rising deposit costs continue to outpace asset yields and further pressure net interest margin and earnings.
- Trends in nonperforming loans, especially SBA property exposures, charge-offs and allowance adequacy.
- Deposit stability and funding mix, including time-deposit maturities, brokered deposits and the use of available borrowing capacity.
- Whether loan growth, credit commitments and the real-estate-heavy portfolio remain consistent with the Bank’s risk appetite and capital position.