PCB Bancorp — Q2 2020 Form 10-Q
Business and period. PCB Bancorp is the bank holding company for Pacific City Bank, serving businesses and individuals through branches primarily in California and loan offices in several U.S. markets. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with 2019 unless noted.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net interest income | $15.4 million | $17.7 million | Down 13.2% |
| Provision for loan losses | $3.9 million | $0.4 million | Up $3.5 million |
| Net income | $3.4 million | $6.6 million | Down 49.0% |
| Diluted EPS | $0.22 | $0.40 | Lower |
| Net interest margin | 3.22% | 4.17% | Down 95 basis points |
| Efficiency ratio | 53.04% | 52.95% | Slightly higher |
- Six-month results: Net interest income was $31.9 million versus $34.8 million; provision for loan losses was $6.8 million versus $0.3 million; net income was $6.9 million versus $13.2 million; diluted EPS was $0.45 versus $0.81. Six-month net interest margin was 3.52%, compared with 4.19%.
- Drivers: Lower market rates reduced asset yields and interest income. Lower deposit costs partly offset the pressure. Noninterest expense fell 11.7% in Q2 to $9.7 million, while noninterest income declined 4.5% to $2.9 million.
- Balance sheet at June 30: Assets were $2.02 billion, up 15.7% from year-end 2019. Loans held for investment were $1.55 billion, up 7.1%; deposits were $1.65 billion, up 11.3%. Shareholders’ equity was $227.2 million.
- Credit: The allowance for loan losses was $20.2 million, or 1.30% of loans held for investment (1.43% excluding PPP loans), versus $14.4 million, or 0.99%, at year-end. Nonperforming loans were $4.5 million, 0.29% of loans, versus $2.8 million, 0.19%, at year-end; nonperforming assets were $4.8 million, or 0.24% of assets. Six-month net charge-offs were $0.9 million.
- Cash flow and liquidity: Cash and cash equivalents were $307.6 million, up from $146.2 million at year-end. For the first six months, operating cash flow was $4.8 million, investing cash outflow was $112.1 million, and financing cash inflow was $268.7 million. Management reported $425.3 million of available borrowing capacity, including FHLB, Federal Reserve and federal funds lines.
- Borrowings and capital: FHLB advances were $130.0 million, versus $20.0 million at year-end; the June balance carried a weighted-average rate of 0.51%. The Bank’s common equity tier 1 ratio was 15.58% and total capital ratio was 16.83%, above applicable “well-capitalized” thresholds.
Material changes and unusual items
- COVID-19-related risk drove an additional loan-loss provision; management said the longer-term pandemic impact could not yet be estimated.
- The Bank originated 1,551 Paycheck Protection Program loans totaling $133.7 million net of deferred fees and costs. It also modified 467 customers’ loans totaling $484.0 million, mainly through payment deferrals or interest-only arrangements. These modifications were reported as current, accruing and pass-rated under CARES Act relief, rather than as troubled debt restructurings.
- For liquidity management, the company transferred all $18.8 million of held-to-maturity securities to available-for-sale. The transfer increased pretax accumulated other comprehensive income by $0.8 million and limits its ability to classify debt securities as held-to-maturity for up to two years.
- Noninterest-bearing deposits rose to $551.4 million from $360.0 million at year-end; management attributed growth partly to PPP-related customer deposits and broader liquid deposit inflows. Time deposits declined.
- The company repurchased and retired 428,474 shares for $6.5 million, completing its repurchase program in March. It declared and paid a Q2 dividend of $0.10 per share; a further $0.10 dividend was declared in July for payment in September.
Outlook, risks and contingencies
The filing provides no numerical earnings or other formal guidance. Management expects COVID-19 to continue weighing on results and financial condition, but cannot estimate the duration or full impact. Risks include borrower stress and collateral-value declines, loan delinquencies and credit losses, reduced fee income, low interest rates and margin pressure, deposit and liquidity volatility, and operational or cybersecurity disruption. The portfolio is concentrated in real estate lending.
The Bank remains subject to a regulatory consent order concerning Bank Secrecy Act/anti-money-laundering controls. Management reported corrective actions and required progress reports, but satisfaction of the order is at regulators’ discretion; the order also limits certain new activities absent regulatory non-objection. Management did not expect related expenses or the order to materially affect results or financial position. The company reported no accrued legal loss contingency, but said additional losses were reasonably possible and could not be estimated. It plans to adopt the expected-credit-loss standard (CECL) on January 1, 2023.
Key facts investors should verify
- Whether the $484.0 million of modified loans resume contractual payments and how borrower performance affects delinquencies, nonperforming assets and future provisions.
- Whether the allowance remains adequate as pandemic conditions and real estate collateral values evolve, including the treatment of PPP loans and guarantees.
- How lower asset yields, deposit repricing and elevated cash balances affect net interest margin and earnings in subsequent quarters.
- Whether deposit growth and borrowing capacity remain available, and the cost and maturity profile of increased FHLB advances.
- Progress toward regulatory satisfaction and termination of the BSA/AML consent order, and any resulting costs or business restrictions.