PCB Bancorp(US:PCB)2020-03-09 20:12Part I Business PCB Bancorp is a California-based bank holding company serving small to medium-sized businesses and individuals, primarily within the Korean-American community, operating 13 branches and 10 loan production offices, and is subject to a 2019 BSA/AML consent order - The company changed its name to PCB Bancorp on July 1, 2019, aligning with its stock trading symbol16 - The company completed its IPO on August 14, 2018, raising $45.0 million in net proceeds17 Loan Portfolio Composition (Held-for-Investment) | Loan Category | Dec 31, 2019 ($ in thousands) | % of Total | Dec 31, 2018 ($ in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Real estate loans: | | | | | | Commercial property | $803,014 | 55.4% | $709,409 | 53.1% | | Residential property | $235,046 | 16.3% | $233,816 | 17.5% | | SBA property | $129,837 | 8.9% | $120,939 | 9.0% | | Construction | $19,164 | 1.3% | $27,323 | 2.0% | | Commercial & industrial loans: | | | | | | Commercial term | $103,380 | 7.1% | $102,133 | 7.6% | | Commercial lines of credit | $111,768 | 7.7% | $91,994 | 6.9% | | SBA commercial term | $25,332 | 1.7% | $27,147 | 2.0% | | Other consumer loans | $23,290 | 1.6% | $25,921 | 1.9% | | Total Loans held-for-investment | $1,450,831 | 100.0% | $1,338,682 | 100.0% | - The Bank is designated as an SBA Preferred Lender nationwide, streamlining its SBA loan process44 - Core deposits, excluding time deposits over $250,000 and brokered deposits, constituted 74.2% of total deposits as of December 31, 2019, serving as the primary low-cost funding source53 - The Bank is subject to an April 2019 consent order from the FDIC and CDBO, mandating BSA/AML compliance improvements, with non-compliance potentially restricting business operations including new branch openings137 Risk Factors The company faces significant risks from its business operations, loan portfolio, and regulatory environment, including credit risk, interest rate sensitivity, liquidity management, a high concentration in real estate loans (81.8%), and substantial regulatory oversight due to a BSA/AML consent order and Basel III capital requirements - Effective credit risk management is crucial, as inadequate underwriting could result in loan defaults, foreclosures, and higher allowance for loan losses167168 - The Bank is under an April 2019 consent order from the FDIC and CDBO for enhanced BSA/AML processes, with non-compliance potentially restricting growth like new branch or LPO openings181 - 81.8% of the loan portfolio at December 31, 2019, comprised real estate loans, increasing vulnerability to real estate market downturns and liquidity issues189 - Commercial Real Estate (CRE) loans constituted 243.6% of total risk-based capital as of December 31, 2019, remaining below the 300% regulatory guidance but still a focus of oversight199200 - The residential loan portfolio primarily consists of non-qualified mortgage loans, which are less liquid and potentially riskier than qualified mortgages201202 - Gain on sale of SBA loans was a significant 49.8% of noninterest income in 2019, making profitability vulnerable to changes in the SBA 7(a) loan program208209 - Operations are geographically concentrated in Southern California and the New York/New Jersey region, and ethnically focused on the Korean-American community, increasing exposure to localized economic or political factors282285 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None318 Properties The company's headquarters is located at 3701 Wilshire Boulevard, Los Angeles, California, with all 13 retail branch locations and 10 loan production offices being leased - The Bank leases all its properties, including its headquarters, 13 branch locations, and 10 LPOs across multiple states319320 Legal Proceedings The company is involved in various legal claims, with $8 thousand in accrued loss contingencies as of December 31, 2019, and management anticipates no material effect on consolidated financial statements - The Company accrued $8 thousand in loss contingencies for legal claims at December 31, 2019, with no material impact expected from these proceedings321 Mine Safety Disclosures This item is not applicable to the company - Not applicable322 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NASDAQ Global Select Market under "PCB", with a policy of paying quarterly dividends subject to Board discretion and regulatory limits, and completed a $6.5 million share repurchase program in 2019, approving a new one through November 2021 - The company's common stock is listed on the NASDAQ Global Select Market under the symbol "PCB"324 - The company intends to continue paying quarterly dividends, subject to Board discretion, financial condition, and regulatory requirements325326 - A $6.5 million share repurchase program was completed in October 2019, repurchasing 396,715 shares, and a new $6.5 million program was approved through November 20, 2021328329 Selected Financial Data This section summarizes the company's key financial data from 2017 to 2019, showing total assets grew from $1.44 billion to $1.75 billion, loans held-for-investment increased from $1.19 billion to $1.45 billion, and net income remained stable around $24 million, with strong asset quality Selected Financial Data (2017-2019) | ($ in thousands, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Balance Sheet Data: | | | | | Total assets | $1,746,328 | $1,697,028 | $1,441,999 | | Loans held-for-investment | $1,450,831 | $1,338,682 | $1,189,999 | | Total deposits | $1,479,307 | $1,443,753 | $1,251,290 | | Shareholders' equity | $226,834 | $210,296 | $142,184 | | Income Statement Data: | | | | | Net interest income | $69,034 | $65,748 | $55,170 | | Provision for loan losses | $4,237 | $1,231 | $1,827 | | Net income | $24,108 | $24,301 | $16,403 | | Per Share Data: | | | | | Earnings per common share, diluted | $1.49 | $1.65 | $1.21 | | Book value per common share | $14.44 | $13.16 | $10.60 | | Performance Ratios: | | | | | Return on average assets | 1.40% | 1.53% | 1.22% | | Return on average shareholders' equity | 10.88% | 14.26% | 12.00% | | Net interest margin | 4.11% | 4.23% | 4.22% | | Asset Quality: | | | | | Nonperforming assets to total assets | 0.16% | 0.06% | 0.23% | | Allowance for loan losses to loans held-for-investment | 0.99% | 0.98% | 1.03% | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, PCB Bancorp's net income slightly decreased to $24.1 million from $24.3 million in 2018, primarily due to higher loan loss provisions and increased noninterest expenses, despite growth in net interest income and total assets to $1.75 billion, while maintaining strong asset quality and a well-capitalized position Critical Accounting Policies The company's critical accounting policies involve significant judgment and estimates, including the Allowance for Loan Losses, Investment Securities valuation and impairment, and Income Taxes - Key subjective accounting areas include Allowance for Loan Losses, Investment Securities valuation and impairment, and Income Taxes337 - The Allowance for Loan Losses is a critical estimate based on past experience, portfolio nature, borrower situations, and economic conditions, comprising specific and general reserves342343346 - Investment securities are evaluated quarterly for other-than-temporary impairment (OTTI), with credit losses recognized in earnings and other portions in other comprehensive income339340 Results of Operations For 2019, net income decreased 0.8% to $24.1 million, primarily due to a $3.0 million increase in loan loss provision and a 5.2% rise in noninterest expense, partially offset by a 5.0% increase in net interest income to $69.0 million and a 13.5% increase in noninterest income, while net interest margin compressed to 4.11% Results of Operations Summary | ($ in thousands) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $69,034 | $65,748 | 5.0% | | Provision for Loan Losses | $4,237 | $1,231 | 244.2% | | Noninterest Income | $11,869 | $10,454 | 13.5% | | Noninterest Expense | $42,315 | $40,226 | 5.2% | | Net Income | $24,108 | $24,301 | -0.8% | - Net interest income increased by $3.3 million (5.0%) in 2019 due to a 7.9% increase in average interest-earning assets, though net interest margin declined by 12 basis points to 4.11% due to higher deposit costs360 - Provision for loan losses significantly increased to $4.2 million in 2019 from $1.2 million in 2018, primarily due to a $2.5 million charge-off on a commercial line of credit and organic loan growth373374 - Noninterest income rose 13.5% to $11.9 million in 2019, driven by a $786 thousand gain on securities sales and a $436 thousand increase in gain on loan sales376 - Noninterest expense increased 5.2% to $42.3 million in 2019, driven by higher salaries and professional fees for public company infrastructure and enhanced BSA/AML compliance385 Financial Condition As of December 31, 2019, total assets grew 2.9% to $1.75 billion, driven by an 8.4% increase in loans held-for-investment to $1.45 billion, funded by a 2.5% increase in deposits to $1.48 billion, while maintaining strong asset quality and a well-capitalized position with 16.71% total risk-based capital Balance Sheet Highlights | ($ in thousands) | Dec 31, 2019 | Dec 31, 2018 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $1,746,328 | $1,697,028 | 2.9% | | Net Loans Held-for-Investment | $1,436,451 | $1,325,515 | 8.4% | | Total Investment Securities | $117,720 | $168,751 | -30.2% | | Total Deposits | $1,479,307 | $1,443,753 | 2.5% | | Shareholders' Equity | $226,834 | $210,296 | 7.9% | - The investment securities portfolio decreased by $51.0 million, primarily due to a $32.8 million sale of available-for-sale securities and principal paydowns400 - Nonperforming assets (NPAs) increased to $2.8 million (0.16% of total assets) at year-end 2019 from $1.1 million (0.06% of total assets) at year-end 2018, primarily due to one commercial line of credit placed on nonaccrual status414 - The Bank's CRE loans were 243.6% of total risk-based capital at year-end 2019, a decrease from 253.6% in 2018, remaining below the 300% regulatory guidance threshold418 - The Bank exceeded all regulatory capital requirements to be considered "well-capitalized" as of December 31, 2019, with a Common Equity Tier 1 ratio of 15.68% and a Total Capital ratio of 16.71%431432 Liquidity and Capital Resources The company maintains a solid liquidity position, supported by liquid assets and access to funding sources, with $404.8 million in FHLB and $37.9 million in Federal Reserve Discount Window borrowing capacity as of December 31, 2019, and the parent company relies on Bank dividends for its obligations - The company's primary liquidity sources are cash flow from operations, maturing loans and investments, and customer deposits436 - As of December 31, 2019, the company had substantial unused borrowing capacity, including $404.8 million from the FHLB and $37.9 million from the Federal Reserve Discount Window438 - PCB Bancorp, the parent company, relies on dividends from Pacific City Bank to meet its cash obligations, including shareholder dividends439 Off-Balance Sheet Activities and Contractual Obligations The company's off-balance sheet arrangements, primarily financial commitments, totaled $175.2 million as of December 31, 2019, a significant increase from $130.9 million in 2018, with contractual obligations, mainly time deposits, totaling $788.0 million, which management believes it has sufficient liquidity to meet Outstanding Financial Commitments | ($ in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commitments to extend credit | $171,608 | $127,443 | | Standby letters of credit | $3,300 | $2,998 | | Commercial letters of credit | $292 | $477 | | Total | $175,200 | $130,918 | Contractual Obligations Summary (as of Dec 31, 2019) | ($ in thousands) | Within 1 Year | 1 to 3 Years | 3 to 5 Years | Over 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Time deposits | $734,003 | $21,529 | $1,557 | $— | $757,089 | | FHLB advances | $10,000 | $10,000 | $— | $— | $20,000 | | Operating leases | $2,686 | $4,454 | $2,375 | $1,352 | $10,867 | | Total | $746,689 | $35,983 | $3,932 | $1,352 | $787,956 | Quantitative and Qualitative Disclosures About Market Risk The company actively manages interest rate risk through its ALCO using NII at Risk and EVE models, and as of December 31, 2019, it was asset sensitive, projecting a 10.4% increase in Net Interest Income and a 4.7% increase in EVE with a hypothetical 100 basis point rate increase - The company manages interest rate risk through its Asset Liability Committee (ALCO) using Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (EVE) models449453 Interest Rate Sensitivity Analysis (as of Dec 31, 2019) | Simulated Rate Change | Net Interest Income Sensitivity | Economic Value of Equity Sensitivity | | :--- | :--- | :--- | | +200 bps | 20.3% | 7.7% | | +100 bps | 10.4% | 4.7% | | -100 bps | (11.7)% | (6.1)% | - The company increased its proportion of fixed-rate loans during 2019 to better position the balance sheet for the interest rate environment452 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for PCB Bancorp and its subsidiary for the years ended December 31, 2019, 2018, and 2017, including Balance Sheets, Income Statements, Comprehensive Income, Changes in Shareholders' Equity, and Cash Flows, along with notes Consolidated Balance Sheets As of December 31, 2019, total assets were $1.75 billion, up from $1.70 billion in 2018, driven by an increase in net loans held-for-investment to $1.44 billion, with total liabilities at $1.52 billion, total deposits at $1.48 billion, and shareholders' equity at $226.8 million Consolidated Balance Sheet Summary | ($ in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total cash and cash equivalents | $146,228 | $162,273 | | Net loans held-for-investment | $1,436,451 | $1,325,515 | | Total assets | $1,746,328 | $1,697,028 | | Total deposits | $1,479,307 | $1,443,753 | | Total liabilities | $1,519,494 | $1,486,732 | | Total shareholders' equity | $226,834 | $210,296 | Consolidated Statements of Income For the year ended December 31, 2019, net income was $24.1 million, or $1.49 per diluted share, a slight decrease from $24.3 million, or $1.65 per diluted share, in 2018, primarily due to a higher provision for loan losses ($4.2 million vs. $1.2 million) Consolidated Income Statement Summary | ($ in thousands, except per share) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net interest income | $69,034 | $65,748 | $55,170 | | Provision for loan losses | $4,237 | $1,231 | $1,827 | | Noninterest income | $11,869 | $10,454 | $13,894 | | Noninterest expense | $42,315 | $40,226 | $35,895 | | Net income | $24,108 | $24,301 | $16,403 | | Earnings per share, diluted | $1.49 | $1.65 | $1.21 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None622 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no attestation report required as an Emerging Growth Company - The company's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2019624 - Management assessed internal control over financial reporting and determined it was effective as of December 31, 2019, based on the COSO framework627628 Other Information This section reiterates the April 30, 2019, consent order with the FDIC and CDBO regarding the Bank's BSA/AML compliance program, requiring enhanced oversight and a "look back" review, with ongoing compliance efforts and no expected material financial impact - Reiterates the April 30, 2019, consent order with the FDIC and CDBO concerning the Bank's BSA/AML program632 - The order requires numerous corrective actions, including increased Board oversight, enhanced monitoring, and a "look back" review of past transactions, with regulators recently raising concerns about review depth and staff turnover633634 - The company does not expect the order to have a material impact on its financial results, though it will incur additional non-interest expenses for compliance635 Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the 2020 Proxy Statement637 Executive Compensation Information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the 2020 Proxy Statement639 Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters Information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the 2020 Proxy Statement640 Certain Relationships and Related Transactions, and Directors Independence Information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the 2020 Proxy Statement641 Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Shareholders - Information is incorporated by reference from the 2020 Proxy Statement642 Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, with all required financial statements included in Item 8 and schedules omitted as not required - This section provides a list of all exhibits filed with the Form 10-K, including articles of incorporation, bylaws, employment agreements, and various certifications643645 Form 10-K Summary No Form 10-K summary is provided - None644