PCB Bancorp: 2.65% dividend and virtually no non-performing assets (NASDAQ: PCB)
PCB Bancorp (PCB) is a small regional bank with 11 branches in Los Angeles and Orange counties in California and one branch in New Jersey and New York State. According to the balance sheet, almost two-thirds of its loan portfolio is invested in commercial real estate, which means the bank offers exposure to the CRE sector in these areas.
A decent result in 2021, but also fueled by the recovery of loan loss provisions
PCB Bancorp saw its net interest income increase again in 2021 after a slight decline in 2020. Thanks to the combination of growing interest income and falling interest expense, the net income of interest increased to just over $77 million.
The bank also recorded total non-interest income of $18.4 million and non-interest expense of $43.2 million, resulting in net non-interest expense of $25 million. Provision for pre-tax and loan losses was approximately $52 million. The income statement shows that PCB was able to recover over $4.5 million in loan loss provisions, which brought pre-tax income to $57 million and on an after-tax basis net income was $57 million. $40.1 million, representing EPS of $2.66 per share.
This is a great result, especially because PCB is trading at just over $22.50, indicating a multiple of just 8.5 times earnings. Sounds pretty cheap, but keep in mind that fiscal 2021 results were boosted by the reversal of historical provisions and if we used a normalized loan loss provision rate of $4-5 million per year, net income would likely have dropped to around $35 million. for EPS of $2.35/share. So even after taking the boost of the one-time element out of the equation, the PCB still seems to be cheap.
The bank recently increased its dividend by 25% and currently pays a quarterly dividend of $0.15 per share. On an annualized basis, the dividend of $0.60 represents a yield of 2.65%.
The balance sheet contains exposure to commercial real estate
As mentioned in the introduction, the loan portfolio provides exposure to commercial real estate. Looking at the asset side of the balance sheet.
Approximately $200 million of assets are invested in highly liquid assets and with an additional $123 million in securities, approximately 15% of the total balance sheet has been invested in fairly liquid assets. I’m mainly interested in the $1.7 billion+ loan book to check what exactly is in it and how good the loans are.
More than 60% of loans are invested in commercial real estate. Although this may initially be a problem for investors, PCB Bancorp provides an excellent breakdown of these CRE loans and it is remarkable to see the the average LTV ratio is quite low.
So while I’m not necessarily a fan of a high percentage of commercial real estate in a portfolio, but given the low LTV ratios, I’m not overly concerned about the quality of the loan portfolio. An additional argument can be found in the (lack of) non-performing assets. At the end of last year, there were only $1 million in loans on unexpired status, representing 0.05% of total assets. And although the total amount of delinquent loans is exceptionally low, PCB Bancorp still has a very healthy provision for loan losses on its balance sheet, which translates into a non-performing loan coverage ratio of over 2,000%.
PCB Bancorp still appears to be quite cheap, as even adjusting reported results for loan loss cancellation, EPS would still be significantly above $2/share. The stock price is currently trading at a roughly 31% premium to book value, but given the payout ratio is around 25-30%, PCB is holding over $1.5/ share per year in earnings, which means the book value will increase towards $20/share by the end of next year.
On top of that, the bank continues to buy back its shares. The company ended 2018 with a stock count of just under 16 million shares and reduced that number to under 15 million shares despite the continued exercise of stock options by the employees. In 2021, the bank repurchased just over 680,000 shares for less than $11 million, indicating it was paying just $16 per share on average. A very solid decision because it means that future profits will have to be spread over fewer shares outstanding.
I currently do not hold any position with PCB Bancorp, but the bank has been added to my watch list because the higher level of risk associated with commercial real estate is mitigated by low LTV ratios.