PCB Bancorp (Pacific City Financial Corporation) — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are primarily with December 31, 2018. The company is a bank holding company operating Pacific City Bank, serving businesses and individuals through branches and loan-production offices in several U.S. markets.
Financial performance and condition
- Profit: Net income was $6.56 million, up 4.8% from $6.26 million. Diluted EPS was $0.40 versus $0.46, reflecting a larger weighted-average share count following the 2018 IPO.
- Revenue and margins: Net interest income rose 12.2% to $17.15 million as interest income growth exceeded higher funding costs. Net interest margin was 4.22%, down from 4.33%; net interest spread declined to 3.59% from 3.92%. Total interest income increased 23.2%, while interest expense increased 73.9%. Noninterest income fell 28.3% to $2.41 million, mainly because gain on loan sales declined 47.1%.
- Costs and returns: Noninterest expense increased 6.8% to $10.29 million, including higher salaries, occupancy and professional fees. The efficiency ratio worsened to 52.60% from 51.62%. Annualized return on assets was 1.57% versus 1.73%; return on equity was 12.43% versus 17.50%.
- Assets and lending: Total assets were $1.72 billion, up 1.2% from year-end. Loans held for investment were $1.343 billion, up 0.3%; real estate loans represented 81.8% of the portfolio. Total deposits were $1.448 billion, up 0.3%.
- Credit quality: The allowance for loan losses was $13.1 million, or 0.98% of loans, compared with 1.01% at year-end. The quarter recorded an $85,000 reversal of provision and $55,000 in net recoveries. Nonperforming loans were $1.27 million; nonperforming assets were $1.67 million, including $395,000 of other real estate owned. Nonperforming assets increased from $1.06 million at year-end.
- Cash flow, debt and liquidity: Operating cash flow was $10.9 million versus $10.0 million in Q1 2018. Cash and cash equivalents were $173.6 million at quarter-end. FHLB advances remained $30 million. The company reported $394.3 million of additional FHLB borrowing capacity, $39.6 million of available Federal Reserve borrowing capacity and $60 million of unused unsecured federal funds lines.
- Capital: Shareholders’ equity was $217.2 million, up from $210.3 million at year-end. The Bank’s common Tier 1 and total capital ratios were 16.41% and 17.42%, respectively, and it was reported as well-capitalized.
Material changes, outlook, risks and unusual items
- Interest expense rose sharply as deposit costs increased and time-deposit balances grew; management cited higher market rates and deposit competition. Loan-sale gains declined amid lower SBA loan sale volumes and premiums.
- On April 30, 2019, after quarter-end, the Bank consented to an FDIC and California Department of Business Oversight order concerning weaknesses in its BSA/AML compliance program. Required measures include strengthening oversight, staffing, monitoring, customer due diligence, training, independent testing and a review of certain 2018 transactions. Regulators must give prior non-objection to specified changes, including new offices and products. Management expected compliance costs but did not expect a material financial impact; regulators will assess compliance in later examinations.
- The company adopted lease accounting effective January 1, 2019, recognizing $9.6 million of right-of-use assets and $10.6 million of lease liabilities, with a $53,000 reduction to retained earnings. The filing says the adoption had no material impact beyond balance-sheet recognition.
- The board approved a $6.5 million share-repurchase program to begin in Q2 2019. A $0.06-per-share Q2 dividend was declared after quarter-end, up from $0.05 in Q1 2019.
- No earnings or operating guidance is provided. Key stated risks include real-estate concentration, borrower and collateral performance, interest-rate and liquidity changes, competition, regulatory compliance, and cyber and operational risks. The company expected to adopt the expected-credit-loss standard in 2020 and said its initial assessment indicated a potentially material one-time allowance adjustment.
- Commitments to extend credit and letters of credit totaled $143.3 million at March 31, 2019; these amounts do not necessarily represent future cash outflows. Management said pending litigation was not expected to materially affect results, while noting it could not estimate a range of possible additional losses.
Important facts for investors to verify
- Progress, costs and regulatory consequences of the BSA/AML consent order, including findings from the required transaction look-back and subsequent examinations.
- Whether deposit repricing and competition continue to pressure net interest margin and funding costs.
- Credit trends in the real-estate-heavy loan portfolio, especially SBA property loans, nonaccruals, other real estate owned and allowance adequacy.
- Execution and use of the $6.5 million repurchase authorization, alongside dividend payments and regulatory constraints on distributions.
- Impact of the expected-credit-loss standard on the allowance and reported capital when adopted.