PCB Bancorp — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; balance-sheet figures are as of that date. PCB Bancorp is a California bank holding company whose subsidiary, Pacific City Bank, serves businesses and individuals through branches and loan production offices. The audited financial statements received an unqualified opinion from Crowe LLP.
Financial performance and condition
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net interest income | $77.1 million | $66.2 million | Up 16.5% |
| Net income | $40.1 million | $16.2 million | Up 147.9% |
| Diluted earnings per share | $2.62 | $1.04 | Up |
| Net interest margin | 3.83% | 3.53% | Up 30 basis points |
| Noninterest income | $18.4 million | $11.7 million | Up 57.0% |
| Noninterest expense | $43.2 million | $41.7 million | Up 3.6% |
| Efficiency ratio | 45.21% | 53.51% | Improved |
Management attributed the earnings increase chiefly to lower funding costs, growth in average earning assets, higher SBA loan-sale gains, and a $4.6 million reversal of loan-loss provision, versus a $13.2 million provision in 2020. Net interest income benefited from a 74-basis-point reduction in average cost of interest-bearing liabilities; average yield on interest-earning assets declined 20 basis points. The $12.8 million gain on SBA loan sales was a significant contributor to noninterest income.
Total assets grew 11.8% to $2.15 billion. Loans held for investment rose 9.4% to $1.73 billion, or 15.1% excluding PPP loans. Commercial property loans were $1.11 billion, and real-estate loans represented 84.0% of loans held for investment. Deposits increased 17.1% to $1.87 billion, including a substantial increase in noninterest-bearing demand deposits. Core deposits were 80.9% of deposits; wholesale deposits were $185.0 million, or 9.9%.
Cash and cash equivalents were $203.3 million. Available borrowing capacity was reported at $610.4 million; this included $516.2 million of additional FHLB capacity, $65.0 million of unused federal funds lines, and $29.2 million at the Federal Reserve Discount Window. FHLB advances fell to $10.0 million from $80.0 million. Shareholders’ equity was $256.3 million. The Bank’s CET1, total capital, and leverage ratios were 14.48%, 15.73%, and 11.85%, respectively, all above well-capitalized thresholds.
Net cash used in operating activities was $1.6 million, versus $17.1 million provided in 2020. Investing activities used $175.2 million, principally reflecting loan growth and a $29.3 million bank-owned life insurance purchase; financing activities provided $186.0 million, primarily from deposit growth. Cash increased by $9.2 million during the year.
Material changes and notable items
- Credit quality indicators improved: nonperforming loans declined to $994,000, or 0.06% of loans, from $3.2 million, or 0.20%; nonperforming assets fell to 0.05% of total assets. Net charge-offs were negative $467,000, reflecting net recoveries.
- The allowance for loan losses declined to $22.4 million from $26.5 million; coverage was 1.29% of loans, or 1.34% excluding PPP loans. The provision reversal reflected lower qualitative reserves for pandemic-related uncertainty.
- Outstanding COVID-modified loans fell to none from $36.1 million at year-end 2020. PPP loans declined to $65.3 million from $135.7 million, with $181.8 million in forgiveness recognized during 2021.
- The company repurchased 680,269 shares for $10.9 million and declared $0.44 per share in dividends, up from $0.40. It reported returning 43.7% of 2021 earnings to common shareholders through dividends and repurchases.
- Unrealized losses on available-for-sale securities increased; the portfolio’s net unrealized gain was $13,000 at year-end, compared with $2.6 million in 2020. The company reported no impairment and said it did not expect to have to sell the loss-position securities before recovery.
Outlook, risks, and contingencies
The filing provides no specific earnings, growth, or margin guidance. Management said the long-term effects of COVID-19 remain difficult to estimate and may continue to affect results and financial condition. It cited pandemic-related uncertainty, supply-chain disruptions, inflation, borrower performance, interest-rate changes, and local economic conditions as relevant factors.
Key exposures include the concentration in commercial and real-estate lending, geographic and customer concentration, competition for deposits, and sensitivity of net interest income and securities values to interest rates. The CRE concentration measure was 269.8% of risk-based capital, up from 256.1% in 2020. The company reported positive 8.7% net-interest-income sensitivity to a 100-basis-point parallel rate increase at year-end, based on its model and assumptions.
A 2021 network incident involved unauthorized access to files containing some customer information, including loan-application documents, tax returns, W-2 information, and payroll records. A putative class-action lawsuit was filed in December 2021. The company recorded $100,000 of incident expenses in 2021, expects further costs, and said insurance should provide coverage; the ultimate financial and legal effects remain uncertain.
The company accepted an offer for up to approximately $69.1 million of non-dilutive preferred capital through the U.S. Treasury’s Emergency Capital Investment Program. The final amount and timing remained subject to Treasury determination; the company expected closing in the second quarter of 2022. The company also expects to adopt CECL on January 1, 2023 and stated that the initial allowance adjustment could be material.
Management reported effective disclosure controls and internal control over financial reporting as of year-end. The Bank’s prior BSA/AML consent order was terminated in September 2020. Other litigation loss contingencies were not accrued; management did not expect them to be material, while noting it could not estimate possible additional losses for certain matters.
Important facts for investors to verify
- Whether SBA loan-sale gains and pandemic-related reserve releases are repeatable, and how SBA program changes may affect revenue.
- Loan performance, collateral values, allowance adequacy, and the evolution of the high real-estate and CRE concentration as pandemic relief ends.
- Deposit stability and funding costs, particularly large, uninsured, brokered, and California State Treasurer deposits, and the maturity of time deposits.
- The outcome and insurance recovery for the customer-data incident and related lawsuit, including additional remediation, legal, or reputational costs.
- Final ECIP investment amount, terms, restrictions, and closing; and the effect of CECL adoption on reserves and capital.
- Interest-rate sensitivity assumptions and their effect on net interest margin, securities valuations, and tangible equity.