Pacific City Financial Corporation Reports Earnings of $6.5 Million for Q3 2018

Pacific City Financial Corporation (the "Company") PCB, the holding company of Pacific City Bank (the "Bank"), today reported net income of $6.5 million, or $0.44 per diluted common share for the third quarter of 2018, compared with $4.8 million, or $0.35 per diluted common share, in the previous quarter and $4.8 million, or $0.35 per diluted common share, in the third quarter of 2017.

During the third quarter of 2018, the Company successfully completed its initial public offering ("IPO") for net proceeds of $45.5 million and its common stock began trading on the Nasdaq Global Select Market under the symbol "PCB."

Q3 2018 Financial Highlights

• Net income totaled $6.5 million or $0.44 per diluted common share;
• Total assets were $1.66 billion at September 30, 2018, an increase of $44.6 million, or 2.8%, from $1.62 billion at June 30, 2018 and an increase of $221.8 million, or 15.4%, from $1.44 billion at December 31, 2017;
• Loans held-for-investment, net of deferred costs (fees), were $1.31 billion at September 30, 2018, an increase of $54.3 million, or 4.3%, from $1.25 billion at June 30, 2018 and an increase of $119.1 million, or 10.0%, from $1.19 billion at December 31, 2017; and
• Total deposits were $1.42 billion at September 30, 2018, a decrease of $7.7 million, or 0.5%, from $1.43 billion at June 30, 2018, but an increase of $168.2 million, or 13.4%, from $1.25 billion at December 31, 2017.

"We are pleased to announce a solid 2018 third quarter results that coincided with our successful IPO. The new capital from the IPO is providing us with strong capital ratios and a base to continue to increase the value of our franchise," stated Henry Kim, President and Chief Executive Officer. "We like the direction that our profitability measurements are headed. Our net interest margin increased to 4.17%, our efficiency ratio improved to 49.34%, and our return on average assets improved to 1.60% for the third quarter of 2018 from the prior quarter."

Financial Highlights

Result of Operations

Net Income

Net income was $6.5 million for the three months ended September 30, 2018, an increase of $1.8 million, or 37.4%, from $4.8 million for the three months ended June 30, 2018, and an increase of $1.7 million, or 36.1%, from $4.8 million for the three months ended September 30, 2017. Diluted earnings per common share were $0.44, $0.35 and $0.35, respectively, for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017.

For the nine months ended September 30, 2018, net income was $17.6 million, an increase of $3.5 million, or 24.9%, from $14.1 million for the nine months ended September 30, 2017. Diluted earnings per common share were $1.25 and $1.04 for the nine months ended September 30, 2018 and 2017, respectively.

Net Interest Income and Net Interest Margin

Net interest income was $16.7 million for the three months ended September 30, 2018, an increase of $834 thousand, or 5.3%, from $15.9 million for the three months ended June 30, 2018, and an increase of $2.3 million, or 16.2%, from $14.4 million for the three months ended September 30, 2017.

For the nine months ended September 30, 2018, net interest income was $47.9 million, an increase of $7.7 million, or 19.0%, from $40.2 million for the nine months ended September 30, 2017. These increases were primarily due to increases in average balance and average yield of interest-earning assets, partially offset by increases in average balance and average cost of interest-bearing liabilities.

Interest income on loans was $19.7 million for the three months ended September 30, 2018, an increase of $1.1 million, or 5.9%, from $18.6 million for the three months ended June 30, 2018, and an increase of $3.7 million, or 23.1%, from $16.0 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, interest income on loans was $55.7 million, an increase of $11.1 million, or 24.8%, from $44.7 million for the nine months ended September 30, 2017. The increases were primarily due to increases in average balance and average yield of total loans (which includes both loans held-for-sale and loans held-for-investment, net of deferred cost (fees)). The increase in average yield on total loans was due to the Company's high proportion of variable rate loans that have repriced in the current rising interest rate environment. Average balance of total loans was $1.28 billion for the three months ended September 30, 2018, compared with $1.24 billion for the three months ended June 30, 2018 and $1.12 billion for the three months ended September 30, 2017, and average yield was 6.10% for the three months ended September 30, 2018 compared with 6.04% for the three months ended June 30, 2018 and 5.65% for the three months ended September 30, 2017. For the nine months ended September 30, 2018, average balance and average yield were $1.25 billion and 5.98%, respectively, compared with $1.09 billion and 5.50%, respectively, for the nine months ended September 30, 2017.

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:

Interest income on investment securities was $931 thousand for the three months ended September 30, 2018, an increase of $62 thousand, or 7.1%, from $869 thousand for the three months ended June 30, 2018 and an increase of $185 thousand, or 24.8%, from $746 thousand for the three months ended September 30, 2017. For the nine months ended September 30, 2018, interest income on investment securities was $2.6 million, an increase of $806 thousand, or 43.8%, from $1.8 million for the nine months ended September 30, 2017. The increases 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 $154.0 million for the three months ended September 30, 2018, compared with $147.9 million for the three months ended June 30, 2018 and $140.0 million for the three months ended September 30, 2017, and average yield was 2.40% for the three months ended September 30, 2018 compared with 2.36% for the three months ended June 30, 2018 and 2.11% for the three months ended September 30, 2017. For the nine months ended September 30, 2018, average balance and average yield were $150.5 million and 2.35%, respectively, compared with $120.0 million and 2.05%, respectively, for the nine months ended September 30, 2017.

Total interest expense was $4.8 million for the three months ended September 30, 2018, an increase of $318 thousand, or 7.1%, from $4.5 million for the three months ended June 30, 2018 and an increase of $2.1 million, or 76.6%, compared with $2.7 million in the three months ended September 30, 2017. For the nine months ended September 30, 2018, total interest expense was $12.6 million, an increase of $5.4 million or 75.7%, from $7.2 million for the nine months ended September 30, 2017. The increase compared with the three months ended June 30, 2018 was primarily due to an increase in average cost of interest-bearing liabilities, partially offset by a decrease in average balance of interest bearing liabilities. The increases compared with the three and nine months ended September 30, 2017 was primarily due to increases in both average balance and average cost of interest-bearing liabilities.

Net interest margin was 4.17% for the three months ended September 30, 2018 compared with 4.08% for the three months ended June 30, 2018, and 4.24% for the three months ended September 30, 2017. For the nine months ended September 30, 2018, net interest margin was 4.19% compared with 4.20% for the nine months ended September 30, 2017.

Provision for Loan Losses

Provision for loan losses was $417 thousand for the three months ended September 30, 2018 compared with $425 thousand for the three months ended June 30, 2018 and $586 thousand for the three months ended September 30, 2017. For the nine months ended September 30, 2018, provision for loan losses was $937 thousand compared with $114 thousand for the nine months ended September 30, 2017. The Company has recognized additional provision for loan losses primarily due to an increase in the loans held-for-investment balance. During the three months ended September 30, 2018, the Company recorded a net recovery of $58 thousand compared with a net charge-off of $175 thousand for the three months ended June 30, 2018 and a net recovery of $36 thousand for the three months ended September 30, 2017. Allowance for loan losses to total loans held-for-investment ratio was 1.00% at September 30, 2018, 1.01% at June 30, 2018, 1.03% at December 31, 2017, and 1.02% at September 30, 2017.

Noninterest Income

Noninterest income was $2.6 million for the three months ended September 30, 2018, an increase of $307 thousand, or 13.5%, from $2.3 million for the three months ended June 30, 2018, but a decrease of $881 thousand, or 25.5%, from $3.5 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, noninterest income was $8.2 million, a decrease of $2.3 million, or 22.0%, from $10.5 million for the nine months ended September 30, 2017.

The increase compared with the three months ended June 30, 2018 was primarily due to increases in gain on sale of Small Business Administration ("SBA") loans, service charges and fees on deposits and other income, partially offset by decreases in gain on sale of residential property loans and servicing income. The increase in gain on sale of SBA loans was primarily due to SBA loan sales commitments of $16.7 million that were not settled and included in loans held-for-sale at June 30, 2018, and subsequently settled during July 2018. The decrease compared with the three months ended September 30, 2017 was primarily due to decreases in gain on sale of SBA and residential property loans and servicing income, partially offset by an increase in service charges, fees on deposits and other income. The decrease compared with the nine months ended September 30, 2017 was primarily due to decreases in gain on sale of SBA loans and servicing income, partially offset by increases in gain on sale of residential property and other loans, service charges and fees on deposits, and other income.

The Company sold the guaranteed portion of SBA loans of $23.1 million, $12.6 million and $29.5 million, respectively, and residential property loans of $2.2 million, $7.5 million and $4.3 million, respectively, for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017. For the nine months ended September 30, 2018 and 2017, the Company sold the guaranteed portion of SBA loans of $65.6 million and $98.1 million, respectively, residential property loans of $10.9 million and $10.7 million, respectively, and commercial property loans of $1.1 million and none, respectively. The decreases in servicing income were due to an increase in servicing asset amortization from a higher prepayment trend, partially offset by an increase in servicing fee income resulting from an increase in the amount of loans being serviced. The increases in service charges and fees on deposits were primarily due to an increased transactions in deposits.

Noninterest Expense

Noninterest expense was $9.5 million for the three months ended September 30, 2018, a decrease of $1.4 million, or 13.0%, from $10.9 million for the three months ended June 30, 2018 and an increase of $562 thousand, or 6.3%, from $9.0 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, noninterest expense was $30.1 million, an increase of $3.8 million, or 14.5%, from $26.3 million for the nine months ended September 30, 2017.

The decrease compared with the three months ended June 30, 2018 was primarily due to decreases in salaries and employee benefits, professional fees and other expenses, partially offset by increases in data processing, loan related expense and a regulatory assessment. The decrease in salaries and employee benefits was due primarily to adjustments made to compensation related accruals of $486 thousand. The decrease in professional fees was primarily due to a true-up of expenses that are directly related to the stock offering during the three months ended September 30, 2018. The decrease in other expenses was primarily due to a one-time expense of $577 thousand incurred during the three months ended June 30, 2018 for a reimbursement for a SBA loan guarantee previously paid by the SBA on a loan originated in 2017 that subsequently defaulted and was ultimately determined to be ineligible for the SBA guaranty. The increases in data processing, loan related expense and regulatory assessment were primarily due to growth in operations.

The increases compared to the three and nine months ended September 30, 2017 were primarily due to growth in operations, as well as additional expenses related to the listing of our shares of common stock on the Nasdaq Global Select Market, and a reimbursement paid to SBA.

Efficiency ratio was 49.34% for the three months ended September 30, 2018 compared with 60.26% for the three months ended June 30, 2018 and 50.20% for the three months ended September 30, 2017. For the nine months ended September 30, 2018, efficiency ratio was 53.63% compared with 51.75% for the nine months ended September 30, 2017.

Income Tax Provision

Effective income tax rate was 30.1% and 29.9%, respectively, for the three and nine months ended September 30, 2018 compared with 42.1% and 42.3%, respectively, for the three and nine months ended September 30, 2017. The decreases were 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 $1.66 billion at September 30, 2018, an increase of $44.6 million, or 2.8%, from $1.62 billion at June 30, 2018, an increase of $221.8 million, or 15.4%, from $1.44 billion at December 31, 2017, and an increase of $260.0 million, or 18.5%, from $1.40 billion at September 30, 2017.

Loans

Loans held-for-investment, net of deferred costs (fees) ("total loans held-for-investment"), were $1.31 billion at September 30, 2018, an increase of $54.3 million, or 4.3%, from $1.25 billion at June 30, 2018, an increase of $119.1 million, or 10.0%, from $1.19 billion at December 31, 2017, and an increase of $162.4 million, or 14.2%, from $1.15 billion at September 30, 2017. The increase for the three months ended September 30, 2018 was primarily due to new funding of $159.2 million and advances on lines of credit of $27.2 million, partially offset by pay-downs and pay-offs of $132.2 million, and charge-offs of $45 thousand. The increase for the nine months ended September 30, 2018 was primarily due to new funding of $352.3 million and advances on lines of credit of $96.9 million, partially offset by pay-downs and pay-offs of $322.6 million and charge-offs of $480 thousand.

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

Non-Performing Assets

Non-performing loans ("NPLs") were $1.6 million at September 30, 2018, a decrease of $454 thousand, or 22.4%, from $2.0 million at June 30, 2018 and a decrease of $1.7 million, or 51.4%, from $3.2 million at December 31, 2017, but an increase of $61 thousand, or 4.0%, from $1.5 million at September 30, 2017. NPLs to total loans held-for-investment ratio was 0.12% at September 30, 2018, 0.16% at June 30, 2018, 0.27% at December 31, 2017, and 0.13% at September 30, 2017.

The Company had no other real estate owned ("OREO") at September 30, 2018 and June 30, 2018 compared with $99 thousand at December 31, 2017 and $141 thousand at September 30, 2017.

Non-performing assets ("NPAs"), which consist of NPL and OREO, and the NPAs to total assets ratio were $1.6 million and 0.09%, respectively, at September 30, 2018, $2.0 million and 0.13%, respectively, at June 30, 2018, $3.3 million and 0.23%, respectively, at December 31, 2017, and $1.7 million and 0.12%, respectively, at September 30, 2017.

The following table presents compositions of NPLs and NPAs as of the dates indicated:

Classified Assets

Classified loans were $6.2 million at September 30, 2018, an increase of $1.9 million, or 43.9%, from $4.3 million at June 30, 2018, an increase of $1.3 million, or 25.2%, from $5.0 million at December 31, 2017 and an increase of $418 thousand, or 7.2%, from $5.8 million at September 30, 2017. Classified assets, which consist of classified loans and OREO, and the classified assets to total assets ratios were $6.2 million and 0.37%, respectively, at September 30, 2018, $4.3 million and 0.27%, respectively, at June 30, 2018, $5.1 million and 0.35%, respectively, at December 31, 2017, and $6.0 million and 0.42%, respectively, at September 30, 2017.

Investment Securities

Total investment securities were $157.1 million at September 30, 2018, an increase of $4.6 million, or 3.0%, from $152.5 million at June 30, 2018, an increase of $6.3 million, or 4.2%, from $150.8 million at December 31, 2017 and an increase of $14.2 million, or 9.9%, from $142.9 million at September 30, 2017. The increase for the three months ended September 30, 2018 was primarily due to purchases of $12.0 million, partially offset by principal pay-downs and calls of $6.7 million, net premium amortization of $172 thousand and a decrease in fair value of securities available-for-sale of $604 thousand. The increase for the nine months ended September 30, 2018 was primarily due to purchases of $28.1 million, partially offset by principal pay-downs and calls of $18.6 million, net premium amortization of $578 thousand and a decrease in fair value of securities available-for-sale of $2.6 million.

Deposits

Total deposits were $1.42 billion at September 30, 2018, a decrease of $7.7 million, or 0.5%, from $1.43 billion at June 30, 2018, an increase of $168.2 million, or 13.4%, from $1.25 billion at December 31, 2017 and an increase of $206.3 million, or 17.0%, from $1.21 billion at September 30, 2017. The decrease for the three months ended September 30, 2018 was primarily due to closed accounts of $87.1 million and net balance decreases of $42.5 million, partially offset by new accounts of $121.9 million. The increase for the nine months ended September 30, 2018 was primarily due to new accounts of $505.3 million, partially offset by closed accounts of $255.9 million and net balance decreases of $81.2 million.

The following table presents deposit mix as of the dates indicated:

Borrowings

Borrowings from Federal Home Loan Bank ("FHLB") were $30.0 million at September 30, 2018 and June 30, 2018, and $40.0 million at December 31, 2017 and September 30, 2017. At September 30, 2018, borrowings from FHLB bore fixed interest rates with original maturity terms ranging from two to five years.

Shareholders' Equity

Shareholders' equity was $202.9 million at September 30, 2018, an increase of $51.5 million, or 34.0%, from $151.4 million at June 30, 2018, an increase of $60.8 million, or 42.7%, from $142.2 million at December 31, 2017 and an increase of $62.4 million, or 44.4%, from $140.5 million at September 30, 2017. The increases were primarily due to the net proceeds of $45.5 million from the completion of the Company's underwritten initial public offering as well as the exercise of the underwriters' 30-day option, which resulted an issuance of 2,508,234 shares of the Company's common stock, during the three months ended September 30, 2018.

Capital Ratios

The following table presents capital ratios for the Company and the Bank as of dates indicated:

About Pacific City Financial Corporation

Pacific City Financial Corporation is the bank holding company for Pacific City Bank, a $1.66 billion asset bank, offering a full suite of commercial banking services through its wholly owned subsidiary, Pacific City Bank, a California state chartered bank, 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.

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