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Pacific City Financial Corporation Reports Earnings of $4.8 million for Q2 2018

August 21, 2018

LOS ANGELES--(BUSINESS WIRE)--Aug 21, 2018--Pacific City Financial Corporation (the “Company”) (NASDAQ: PCB), the holding company of Pacific City Bank (the “Bank”), today reported net income of $4.8 million, or $0.35 per diluted common share for the second quarter of 2018, compared with $6.3 million, or $0.46 per diluted common share, in the previous quarter and $4.9 million, or $0.36 per diluted common share, in the second quarter of 2017.

On August 14, 2018, the Company issued and sold 2,385,000 shares of its common stock in an underwritten public offering, for net proceeds of approximately $43.2 million after deducting underwriting discounts and commissions and estimated offering expenses. The underwriters have a 30-day option to purchase up to an additional 357,750 shares of common stock at the initial public offering price less the underwriting discount. The Company intends to use the proceeds for general corporate purposes, including maintenance of its required regulatory capital, to support future organic growth and other strategic alternatives.

Q2 2018 Highlights

Net income totaled $4.8 million or $0.35 per diluted common share; Total assets were $1.62 billion at June 30, 2018, an increase of $40.2 million, or 2.5%, from $1.58 billion at March 31, 2018 and an increase of $177.2 million, or 12.3%, from $1.44 billion at December 31, 2017; Loans held-for-investment, net of deferred costs (fees), were $1.25 billion at June 30, 2018, an increase of $31.6 million, or 2.6%, from $1.22 billion at March 31, 2018 and an increase of $64.9 million, or 5.5%, from $1.19 billion at December 31, 2017; and Total deposits were $1.43 billion, an increase of $45.3 million, or 3.3%, from $1.38 billion at March 31, 2018 and an increase of $176.0 million, or 14.1%, from $1.25 billion at December 31, 2017.

“We are pleased to report another strong quarter that was highlighted by the continuing growth in our total assets supported by strong growth in loans and deposits,” stated Henry Kim, President and CEO. “Our total loans and deposits increased by $79.9 million and $176.0 million, respectively, which represented annualized growth rates of 13.4% and 28.1%, respectively, for the current year.” Mr. Kim continued, “We were able to maintain net interest margin above 4%, while growing our deposit accounts, despite the increase in our deposit cost due to the strong competition in our deposit target markets, as our asset-sensitive balance sheet continues to contribute positive impacts to our net interest margin.”

Result of Operations

Net Income

Net income was $4.8 million for the three months ended June 30, 2018, a decrease of $1.5 million, or 24.0%, from $6.3 million for the three months ended March 31, 2018, and a decrease of $98 thousand, or 2.0%, from $4.9 million for the three months ended June 30, 2017. Diluted earnings per common share was $0.35, $0.46 and $0.36, respectively, for the three months ended June 30, 2018, March 31, 2018 and June 30, 2017. These decreases were primarily due to increases in noninterest expense and provision for loan losses and a decrease in noninterest income, partially offset by an increase in net interest income and a decrease in income tax expense. For the six months ended June 30, 2018, net income was $11.0 million, an increase of $1.8 million, or 19.1%, from $9.3 million for the six months ended June 30, 2017. Diluted earnings per common share was $0.81 and $0.68 for the six months ended June 30, 2018 and 2017, respectively. The increase was primarily due to an increase in net interest income and a decrease in income tax expense, partially offset by increases in noninterest expense and provision for loan losses and a decrease in noninterest income.

Net Interest Income and Net Interest Margin

Net interest income was $15.9 million for the three months ended June 30, 2018, an increase of $588 thousand, or 3.8%, from $15.3 million for the three months ended March 31, 2018, and an increase of $2.5 million, or 18.7%, from $13.4 million for the three months ended June 30, 2017. For the six months ended June 30, 2018, net interest income was $31.2 million, an increase of $5.3 million, or 20.6%, from $25.9 million for the six months ended June 30, 2017. These increases were primarily due to an increase in average balance of interest-earning assets, partially offset by increases in average balance and average cost of interest-bearing liabilities.

Interest income on loans was $18.6 million for the three months ended June 30, 2018, an increase of $1.2 million, or 6.7%, from $17.4 million for the three months ended March 31, 2018, and an increase of $3.8 million, or 25.7%, from $14.8 million for the three months ended June 30, 2017. For the six months ended June 30, 2018, interest income on loans was $36.1 million, an increase of $7.4 million, or 25.7%, from $28.7 million for the six months ended June 30, 2017. These increases were primarily due to increases in average balance and average yield of total loans. The increase in average yield on total loans was due to the Company’s high proportion of variable rates loans that reprice in the current rising interest rate environment. Average balance of loans was $1.24 billion for the three months ended June 30, 2018, compared with $1.22 billion for the three months ended March 31, 2018 and $1.08 billion for the three months ended June 30, 2017, and average yield was 6.04% for the three months ended June 30, 2018 compared with 5.80% for the three months ended March 31, 2018 and 5.51% for the three months ended June 30, 2017. For the six months ended June 30, 2018, average balance and average yield were $1.23 billion and 5.92%, respectively, compared with $1.07 billion and 5.42%, respectively, for the six months ended June 30, 2017.

The following table presents a composition of total loans by interest rate type accompanied with the weighted-average contractual rates as of dates indicated:

Interest income on investment securities was $869 thousand for the three months ended June 30, 2018, an increase of $21 thousand, or 2.5%, from $848 thousand for the three months ended March 31, 2018 and an increase of $281 thousand, or 47.8%, from $588 thousand for the three months ended June 30, 2017. For the six months ended June 30, 2018, interest income on investment securities was $1.7 million, an increase of $621 thousand, or 56.7%, from $1.1 million for the six months ended June 30, 2017. The increase compared with the three months ended March 31, 2018 was primarily due to an increase in average yield, partially offset by a decrease in average balance. The increases compared with the three and six month ended June 30, 2017 were primarily due to increases in average balance and average yield. The increase in average yield was due to additional purchases of investment securities in the current rising rate environment. Average balance of investment securities was $147.9 million for the three months ended June 30, 2018, compared with $149.4 million for the three months ended March 31, 2018 and $115.3 million for the three months ended June 30, 2017, and average yield was 2.36% for the three months ended June 30, 2018 compared with 2.30% for the three months ended March 31, 2018 and 2.07% for the three months ended June 30, 2017. For the six months ended June 30, 2018, average balance and average yield were $148.7 million and 2.33%, respectively, compared with $109.8 million and 2.01%, respectively, for the six months ended June 30, 2018.

Total interest expense was $4.5 million for the three months ended June 30, 2018, an increase of $1.1 million, or 33.8%, from $3.3 million for the three months ended March 31, 2018 and an increase $2.2 million, or 93.6%, compared with $2.3 million in the three months ended June 30, 2017. For the six months ended June 30, 2018, total interest expense was $7.8 million, an increase of $3.3 million or 75.1%, from $4.5 million for the six months ended June 30, 2017. These increases were primarily due to increases in average balance and average cost of interest-bearing liabilities that resulted from the Company’s deposit promotion during the three months ended March 31, 2018 as well as a continuous growth in deposits. During the promotion, the Company raised $122.7 million of interest-bearing deposits at a weighted average rate of 2.21%.

Net interest margin was 4.08% for the three months ended June 30, 2018 compared with 4.33% for the three months ended March 31, 2018, and 4.21% for the year-ago quarter. For the six months ended June 30, 2018, net interest margin was 4.20% compared with 4.18% for the six months ended June 30, 2017.

Provision for Loan Losses

Provision (reversal) for loan losses was $425 thousand for the three months ended June 30, 2018 compared with $95 thousand for the three months ended March 31, 2018 and $(274) thousand for the three months ended June 30, 2017. For the six months ended June 30, 2018, provision for loan losses was $520 thousand compared with $(472) thousand for the six months ended June 30, 2017. The increases were primarily due to an increase in loans held-for-investment balance. During the three months June 30, 2018, the Company recorded a net charge-off of $175 thousand compared with a net recovery of $52 thousand for the three months ended March 31, 2018 and a net charge-off of $12 thousand for the three months ended June 30, 2017. Allowance for loan losses to total loans held-for-investment ratio was 1.01% at June 30, 2018 and March 31, 2018, 1.03% at December 31, 2017, and 1.02% at June 30, 2017.

Noninterest Income

Noninterest income was $2.3 million for the three months ended June 30, 2018, a decrease of $1.1 million, or 32.4%, from $3.4 million for the three months ended March 31, 2018 and a decrease of $1.3 million, or 36.5%, from $3.6 million for the three months ended June 30, 2017. For the six months ended June 30, 2018, noninterest income was $5.6 million, a decrease of $1.4 million, or 20.3%, from $7.1 million for the six months ended June 30, 2017. These decreases were primarily due to a decrease in gain on sale of SBA loans. At June 30, 2018, SBA loan sales commitments of $16.7 million were not settled, all of which were included in loans held-for-sale at June 30, 2018 and subsequently settled during early July 2018. The Company sold guaranteed portion of SBA loans of $12.6 million, $29.9 million, $32.2 million, respectively, and recognized gain on sale of SBA loans of $863 thousand, $2.0 million and $2.3 million, respectively, for the three months ended June 30, 2018, March 31, 2018 and June 30, 2017. For the six months ended June 30, 2018 and 2017, The Company sold guaranteed portion of SBA loans of $42.5 million and $68.3 million, respectively, and recognized gain on sale of SBA loans of $2.9 million and $4.6 million, respectively.

Noninterest Expense

Noninterest expense was $10.9 million for the three months ended June 30, 2018, an increase of $1.3 million, or 13.6%, from $9.6 million for the three months ended March 31, 2018 and an increase of $2.1 million, or 24.4%, from $8.8 million for the three months ended June 30, 2017. For the six months ended June 30, 2018, noninterest expense was $20.6 million, an increase of $3.3 million, or 18.8%, from $17.3 million for the six months ended June 30, 2017. These increases were primarily due to growth in operations, as well as increases of additional legal and professional expense related to the preparation and filing of our S-1 registration statement with the SEC and listing our shares of common stock on the Nasdaq Global Select Market, and a reimbursement paid to SBA. During the three months ended June 30, 2018, the SBA requested us to reimburse for a SBA loan guarantee previously paid by the SBA on a loan we originated in 2007 that subsequently defaulted, which ultimately was determined to be ineligible for SBA guaranty. We incurred a one-time expense of $577 thousand for this reimbursement and a write-off of certain receivables related to collection activities of the loan.

Efficiency ratio was 60.26% for the three months ended June 30, 2018 compared with 51.62% for the three months ended March 31, 2018 and 51.84% for the three months ended June 30, 2017. For the six months ended June 30, 2018, efficiency ratio was 55.88% compared with 52.60% for the six months ended June 30, 2017.

Income Tax Provision

Effective income tax rate was 29.9% for the three and six months ended June 30, 2018, as well as the previous quarter, compared with 42.4% for the three and six months ended June 30, 2017. The decrease was primarily due to the enactment of H.R. 1, also known as the Tax Cuts and Jobs Act, on December 22, 2017. Beginning in 2018, H.R. 1 reduced the U.S. federal corporate tax rate from 35% to 21% and changed or limited certain tax deductions.

Balance Sheet

Total Assets

Total assets were $1.62 billion at June 30, 2018, an increase of $40.2 million, or 2.5%, from $1.58 billion at March 31, 2018, an increase of $177.2 million, or 12.3%, from $1.44 billion at December 31, 2017, and an increase of $256.0 million, or 18.8%, from $1.36 billion at June 30, 2017.

Loans

Loans held-for-investment, net of deferred costs (fees), were $1.25 billion at June 30, 2018, an increase of $31.6 million, or 2.6%, from $1.22 billion at March 31, 2018 and an increase of $64.9 million, or 5.5%, from $1.19 billion at December 31, 2017, and an increase of $175.2 million, or 16.2%, from $1.08 billion at June 30, 2017. The increase for the three months ended June 30, 2018 was primarily due to new funding of $137.9 million and advances on lines of credit of $38.3 million, partially offset by pay-downs and pay-offs of $110.8 million, sales of $20.1 million and charge-offs of $296 thousand. The increase for the six months ended June 30, 2018 was primarily due to new funding of $271.6 million and advances on lines of credit of $69.7 million, partially offset by pay-downs and pay-offs of $209.3 million, sales of $52.3 million and charge-offs of $435 thousand.

The table presents a composition of total loans by loan type as of the dates indicated:

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