PCB Bancorp (Pacific City Financial Corporation) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited filing covers Pacific City Financial Corporation and its bank subsidiary, Pacific City Bank, which serves businesses and individuals through branches and loan-production offices. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $6.54 million, up 36.1% from $4.81 million; diluted EPS was $0.44 versus $0.35.
- Nine-month earnings: Net income was $17.57 million, up 24.9% from $14.06 million; diluted EPS was $1.25 versus $1.04.
- Net interest income: Q3 was $16.72 million, up 16.2%; nine-month total was $47.89 million, up 19.0%. Q3 net interest margin declined to 4.17% from 4.24%; nine-month margin was essentially flat at 4.19% versus 4.20%.
- Other income and expenses: Q3 noninterest income fell 25.5% to $2.58 million, mainly as loan-sale gains declined. Nine-month noninterest income fell 22.0% to $8.22 million. Noninterest expense rose 6.3% in Q3 to $9.52 million and 14.5% for nine months to $30.09 million. Efficiency ratio was 49.34% for Q3 and 53.63% for nine months.
- Taxes: Effective tax rates fell to 30.1% for Q3 and 29.9% for nine months, from 42.1% and 42.3%, respectively, primarily reflecting the federal corporate tax-rate reduction.
- Balance sheet growth: Assets were $1.664 billion, up 15.4% from year-end 2017. Loans held for investment, net of deferred costs, were $1.309 billion, up 10.0%; deposits were $1.420 billion, up 13.4%.
- Capital and debt: Shareholders’ equity was $202.9 million, including $45.5 million net proceeds from the August IPO. FHLB borrowings declined to $30 million from $40 million. The bank’s total risk-based capital ratio was 16.9%, and Tier 1 leverage ratio was 12.4%; management reported capital above regulatory requirements.
- Cash flow and liquidity: Nine-month operating cash flow was $19.95 million; investing activities used $132.31 million and financing activities provided $202.75 million. Cash and cash equivalents ended at $164.06 million, up from $73.66 million at year-end 2017. Additional FHLB borrowing capacity was $374.8 million; unused Federal Reserve capacity was $49.9 million, and unsecured federal funds lines were $60 million.
- Asset quality: Allowance for loan losses was $13.10 million, or 1.00% of loans held for investment. Nonperforming loans were $1.57 million (0.12% of loans), down from $3.23 million at year-end; nonperforming assets were also $1.57 million. Nine-month provision was $0.94 million versus $0.11 million in 2017.
Material changes and notable items
- The company completed its IPO, issuing 2,508,234 shares in total for approximately $45.5 million net proceeds; its shares began trading on Nasdaq under ticker PCB. Shares outstanding increased to 15,972,914 from 13,417,899 at year-end 2017.
- Loan and deposit growth supported higher interest income, but deposit costs rose as rates increased and competition intensified. Q3 cost of funds increased to 1.32% from 0.87%; nine-month cost was 1.21% versus 0.82%.
- Loan-sale gains declined: $1.33 million in Q3 versus $2.16 million, and $4.48 million for nine months versus $6.87 million, primarily due to lower SBA loan sales volume and premiums.
- Nine-month other expense included a one-time $577,000 reimbursement to the SBA related to a 2007 loan guarantee later determined ineligible.
- Available-for-sale securities had $4.52 million of gross unrealized losses at September 30, versus $2.00 million at year-end 2017; the related nine-month other comprehensive loss was $1.82 million. Management attributed losses mainly to rate fluctuations and reported no other-than-temporary impairment.
Outlook, risks, and contingencies
- The filing provides no specific earnings or growth guidance. Management says results to date are not necessarily indicative of full-year results and expects to meet contractual obligations using cash, operating profitability, loan and securities repayments, deposits, and borrowing facilities.
- Key stated risks include economic and real-estate conditions, loan concentration in real estate, borrower and construction-project performance, credit-loss estimates, competition for deposits, rising interest rates, liquidity, regulatory compliance, cybersecurity, and execution of growth plans.
- The bank entered an informal agreement with the FDIC and California regulator in January 2018 requiring improvements to Bank Secrecy Act/anti-money-laundering processes and training and monitoring of high-rate deposits. Failure to comply could adversely affect operations, including branch or loan-office expansion.
- The company is preparing for the expected-credit-loss standard (CECL), effective for it in 2020. Management anticipates a one-time allowance adjustment that could have a material impact, but gives no amount.
- Legal claims are described as ordinary-course matters; management does not expect a material effect, but says additional losses are reasonably possible and cannot currently be estimated. Operating lease commitments were $11.4 million.
Investor verification priorities
- Confirm the sustainability of loan growth and net interest income as deposit costs rise and Q3 net interest margin contracts.
- Review credit quality, real-estate concentration, allowance adequacy, and the progression of nonperforming and restructured loans.
- Assess recurring earnings apart from reduced loan-sale gains and the $577,000 SBA reimbursement, and verify the drivers of higher operating expenses.
- Track compliance with the FDIC/California informal agreement and the eventual CECL allowance effect.
- Verify liquidity and deposit mix, including time-deposit maturities, large and brokered deposits, pledged securities, and available borrowing capacity.
- Note that the cover page marks “No” for having filed all required reports during the preceding 12 months; verify the reason and any implications.