PCB Bancorp Reports Earnings of $6.6 million for Q2 2019

PCB Bancorp (the “Company”) (NASDAQ: PCB), the holding company of Pacific City Bank (the “Bank”), today reported net income of $6.6 million, or $0.40 per diluted common share for the second quarter of 2019, compared with $6.6 million, or $0.40 per diluted common share, for the previous quarter and $4.8 million, or $0.35 per diluted common share, for the year-ago quarter.

On July 1, 2019, the Company changed its corporate name to “PCB Bancorp” from “Pacific City Financial Corporation” to reflect the Company's goal to align the corporate name with the trading symbol of its common stock and simplify corporate communications while maintaining the Company's core branding.

Q2 2019 Financial Highlights

• Net income totaled $6.6 million or $0.40 per diluted common share;
• Total assets were $1.73 billion at June 30, 2019, an increase of $8.7 million, or 0.5%, from $1.72 billion at March 31, 2019, an increase of $29.5 million, or 1.7%, from $1.70 billion at December 31, 2018, and an increase of $107.3 million, or 6.6%, from $1.62 billion at June 30, 2018;
• Loans held-for-investment, net of deferred costs (fees), were $1.40 billion at June 30, 2019, an increase of $52.4 million, or 3.9%, from $1.34 billion at March 31, 2019, an increase of $56.9 million, or 4.2%, from $1.34 billion at December 31, 2018, and an increase of $140.7 million, or 11.2%, from $1.25 billion at June 30, 2018;
• Total deposits were $1.45 billion at June 30, 2019, a decrease of $1.2 million, or 0.1%, from $1.45 billion at March 31, 2019, but an increase of $2.8 million, or 0.2%, from $1.44 billion at December 31, 2018 and an increase of $19.3 million, or 1.4%, from $1.43 billion at June 30, 2018;
  • State and Brokered deposits were $117.5 million at June 30, 2019 compared to $157.5 million, $142.5 million and $152.5 million, respectively, at March 31, 2019, December 31, 2018 and June 30, 2018.
• The Company repurchased 57,551 shares of its common stock totaling $974 thousand under the publicly announced $6.5 million share repurchase program; and
• The Company declared an increased cash dividend of $0.06 per common share.

“We are pleased to report another strong quarterly financial performance highlighted by earnings of $6.6 million, or $0.40 per diluted common share,” stated Henry Kim, President and Chief Executive Officer. “In spite of the uncertain interest rate environment coupled with intense competition on deposits and credits, during the second quarter our held-for-investment loan balance increased $52.4 million, or 3.9%, and our retail deposit balance, excluding wholesale deposits, increased $38.8 million, or 3.0%. We maintained our net interest margin at 4.17% during the quarter and we are successfully carrying our initiative on reducing our asset sensitive balance sheet by increasing the percentage of fixed rate loans to 37.8% at June 30, 2019 compared with 34.6% at March 31, 2019.”

Overall, the increases in net interest income were primarily due to increases in average balance and average yield on loans, partially offset by increases in average balance and average cost of interest-bearing deposits.

The increases in interest and fees on loans were primarily due to increases in both average balance and average yield of loans. The increase in average yield on loans for the current quarter compared with the previous quarter was primarily due to an increase in discount accretion on retained portion of sold SBA loans due to a higher prepayment trend. The increases in average yield on loans for the three and six months ended June 30, 2019 compared with the same periods of 2018 were primarily due to new loan production with higher interest rates than the existing portfolio and Company’s high proportion of variable rate loans that had repriced along with the rising interest rate environment in 2018 and current higher market rate. The following table presents a composition of total loans by interest rate type accompanied with the weighted-average contractual rates as of the dates indicated:

The Company strategically increased the proportion of fixed rate loans during the current quarter as the interest rate environment had become stabilized and in order to better-position its balance sheet to match potential rate changes in the future.

The decrease in interest on investment securities for the current quarter compared with the previous quarter was primarily due to an increase in premium amortization on mortgage-backed securities from a higher prepayment trend in the current quarter. The increases in the three and six months ended June 30, 2019 compared with the same periods of 2018 were primarily due to increases in both average balance and average yield of investment securities. The increase in average yield on investment securities was primarily due to additional purchases of investment securities along with the rising interest rate environment in 2018 and current higher market rate. The Company purchased investment securities of $4.3 million and $36.4 million, respectively, during the current quarter and last 12-month period.

The increase in interest and dividend on other interest-earning assets for the current quarter compared with the previous quarter was primarily due to an increase in average balance, partially offset by a decrease in average yield on interest-bearing deposits in other financial institutions, as the Federal Reserve lowered its interest rate on excess reserve balance from 2.40% to 2.35% in May. The increase in the current quarter compared with the year-ago quarter was primarily due to an increase in average yield on interest-bearing deposits in other financial institutions in the current higher market rates, partially offset by a decrease in average balance. The increase for the six months ended June 30, 2019 compared with the same period of 2018 was primarily due to increases in both average balance and average yield.

The increases in total interest expense were primarily due to increases in average balance and average cost of interest-bearing deposits. The increase in average cost on interest-bearing deposits was primarily due to the rising interest rate environment in 2018 and current higher market rates, and high competition in the Company’s deposit target markets.

Provision (Reversal) for Loan Losses

Provision (reversal) for loan losses was $394 thousand for the current quarter compared with $(85) thousand for the previous quarter and $425 thousand for the year-ago quarter. For the six months ended June 30, 2019 and 2018, the Company recognized provision for loan losses of $309 thousand and $520 thousand, respectively. The Company recorded net charge-offs of $203 thousand for the current quarter compared with net recoveries of $55 thousand for the previous quarter and net charge-offs of $175 thousand for the year-ago quarter. For the six months ended June 30, 2019 and 2018, the Company recorded net charge-offs of $148 thousand and $123 thousand, respectively.

Allowance for loan losses to total loans held-for-investment ratio was 0.96% at June 30, 2019, 0.98% at March 31, 2019, 0.98% at December 31, 2018, and 1.01% at June 30, 2018. The decrease in allowance for loan losses to total loans held-for-investment ratio was primarily due to a decrease in historical loss rates and changes in qualitative adjustment factors.

The increases in gain on sale of SBA loans for the three and six months ended June 30, 2019 compared with the same periods of 2018 were primarily due to an increase in sales volume, partially offset by a decrease in premium rates in the secondary market. The increase for the current quarter compared with the previous quarter was primarily due to increases in both sales volume and premium rates. The Company sold the guaranteed portion of SBA loans of $29.2 million, $21.2 million and $12.6 million, respectively, for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, and $50.4 million and $42.5 million, respectively, for the six months ended June 30, 2019 and 2018. The Company also sold residential property loans of $375 thousand, $2.4 million and $7.5 million, respectively, for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, and $2.8 million and $8.7 million, respectively, for the six months ended June 30, 2019 and 2018, as well as other real estate loans of $1.1 million for the six months ended June 30, 2018.

The decreases in loan servicing income for the three and six months ended June 30, 2019 compared with the same periods of 2018 were primarily due to a lower balance of underlying loans being serviced. Underlying loans being serviced totaled $502.1 million and $540.0 million, respectively, at June 30, 2019 and 2018. The decrease for the current quarter compared with the previous quarter was primarily due to an increase in servicing asset amortization from a higher prepayment trend.

Overall, the increases in salaries and employee benefits were primarily due to an increase in number of employees for supporting the expansion of the Company's infrastructure for being a public company and an enhancement of the controls and processes on Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”) compliance. Comparing the current quarter with the previous quarter, the decrease was primarily due to a decrease in vacation accrual and an increase of deferred loan origination cost, which reduces salaries and benefits at origination, for a higher loan production during the current quarter, partially offset by the increase in number of employees. Comparing the three and six months ended June 30, 2019 with same periods of 2018, the increases were partially offset by decreases in bonus and vacation accruals, as well as a retirement bonus paid to the former chief executive officer of $192 thousand in the three months ended March 31, 2018.

The increases in occupancy and equipment was primarily due to increases in depreciation, occupancy lease and equipment maintenance expense. The Company opened a loan production office in Artesia, California in December 2018.

The decrease in professional fees for the current quarter compared with the previous quarter was primarily due to increased professional fees for enhancement of the Bank's controls and processes on BSA/AML compliance programs during the previous quarter, partially offset by an increase in legal fees for the Annual Meeting of Shareholders and the corporate name change. The decreases for the three and six months ended June 30, 2019 compared with the same periods of 2018 were primarily due to expenses related to the initial public offering (“IPO”) in 2018, partially offset by increases in audit fees for being a public company and expenses related to BSA/AML enhancements.

The increase in market and business promotion for the current quarter compared with the previous quarter was primarily due to an increase in advertising expense.

The increases in regulatory assessments for the three and six months ended June 30, 2019 were due to an increase in assessment rate and an adjustment made for the assessment rate increase for the previous quarter. The increase in assessment rate was primarily due to the recent consent order relating to the Bank’s compliance with BSA/AML.

The increase in other expenses for the current quarter compared with the previous quarter was primarily due to increases in other loan related legal and office expenses. The decrease for the three and six months ended June 30, 2019 compared with the same periods of 2018 was primarily due to a reimbursement paid to the SBA of $577 thousand during the year-ago quarter, partially offset by increases in other loan related legal and office expenses.

Balance Sheet (Unaudited)

Loans

The following table presents a composition of total loans (includes both loans held-for-sale and loans held-for-investment, net of deferred costs (fees)) as of the dates indicated:

The increase in loans held-for-investment for the current quarter was primarily due to new funding of $109.2 million and advances on lines of credit of $30.5 million, partially offset by pay-downs and pay-offs of $87.1 million. The increase for the six months ended June 30, 2019 was primarily due to new funds of $182.4 million and advances on lines of credit of $53.9 million, partially offset by pay-downs and pay-offs of $178.9 million.

The decrease in loans held-for-sale for the current quarter was primarily due to sales of $29.5 million, partially offset by new funding of $26.1 million. The decrease in loans held-for-sale for the six months ended June 30, 2019 was primarily due to sales of $53.1 million, partially offset by new funding of $47.5 million and a loan transferred from loans held-for-investment of $303 thousand.

Classified Assets

Classified loans were $7.5 million at June 30, 2019, an increase of $435 thousand, or 6.2%, from $7.0 million at March 31, 2019, an increase of $1.2 million, or 20.0%, from $6.2 million at December 31, 2018, and an increase of $3.2 million, or 72.7%, from $4.3 million at June 30, 2018. Classified assets, which consist of classified loans and OREO, and the classified assets to total assets ratios were $7.9 million and 0.46%, respectively, at June 30, 2019, $7.4 million and 0.43%, respectively, at March 31, 2019, and $4.3 million and 0.27%, respectively, at June 30, 2018.

Investment Securities

Total investment securities were $165.2 million at June 30, 2019, a decrease of $2.4 million, or 1.5%, from $167.7 million at March 31, 2019, a decrease of $3.5 million, or 2.1%, from $168.8 million at December 31, 2018, but an increase of $12.7 million, or 8.3%, from $152.5 million at June 30, 2018. The decrease for the current quarter was primarily due to principal pay-downs and calls of $8.1 million and net premium amortization of $218 thousand, partially offset by purchases of $4.3 million and an increase in fair value of securities available-for-sale of $1.6 million. The decrease for the six months ended June 30, 2019 was primarily due to principal pay-downs and calls of $14.3 million and net premium amortization of $407 thousand, partially offset by purchases of $8.4 million and an increase in fair value of securities available-for-sale of $2.8 million.

The decrease for the current quarter was primarily due to closed accounts of $99.2 million and net balance decreases of $1.3 million on existing accounts, partially offset by new accounts of $96.6 million. The increase for the six months ended June 30, 2019 was primarily due to new accounts of $229.7 million, partially offset by closed accounts of $194.6 million and net balance decreases of $15.8 million on existing accounts. In order to reduce the reliance on wholesale deposits, the Company reduced state and brokered deposits by $40.0 million, or 34.0%, during the current quarter.

Operating Lease Assets and Liabilities

On January 1, 2019, the Company adopted Accounting Standard Update (“ASU”) 2016-02, “Leases (Topic 842),” and all subsequent ASUs that are related to Topic 842. The Company adopted this ASU using the optional transition method with a cumulative effect adjustment to retained earnings without restating prior financial statements for comparable amounts. As a result, the Company recognized right-of-use assets and liabilities of $9.6 million and $10.6 million, respectively, with a cumulative effect adjustment of $53 thousand to retained earnings at the date of adoption.

Shareholders’ Equity

Shareholders’ equity was $223.4 million at June 30, 2019, an increase of $6.2 million, or 2.8%, from $217.2 million at March 31, 2019, an increase of $13.1 million, or 6.2%, from $210.3 million at December 31, 2018, and an increase of $72.0 million, or 47.5%, from $151.4 million at June 30, 2018. The increases for the three and six months ended June 30, 2019 were primarily due to retention of earnings and increases in other comprehensive income, share-based compensation expense and stock options exercised, partially offset by repurchase of common stock and cash dividends paid on common stock. The year-over-year increase was primarily due to the IPO completed in August 2018 and retention of earnings, partially offset by repurchase of common stock and cash dividends paid on common stock.

On March 28, 2019, the Company’s Board of Directors approved the repurchase of up to $6.5 million of the Company’s common stock through March 27, 2020. During the current quarter, the Company repurchased 57,551 shares of its common stock totaling $974 thousand.

Capital Ratios

Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion. The following table presents capital ratios for the Company and the Bank as of dates indicated:

About PCB Bancorp

PCB Bancorp, formerly known as Pacific City Financial Corporation, is the bank holding company for Pacific City Bank, a California state chartered bank, offering a full suite of commercial banking services to small to medium-sized businesses, individuals and professionals, primarily in Southern California, and predominantly in Korean-American and other minority communities.

Cautionary Note Regarding Forward-Looking Statements

This press release contains forward-looking statements. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as ‘‘may,’’ “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. These and other important factors are detailed in various securities law filings made periodically by the Company, copies of which are available from the Company without charge. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements. Any forward-looking statements presented herein are made only as of the date of this press release, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise, except as required by law.