Pacific City Financial Corporation Reports 2014 First Quarter Financial Results

Pacific City Financial Corporation (the “Company”) (OTCBB:PFCF), the holding company of Pacific City Bank, today reported net income available to common shareholders of $2.3 million, or $0.28 per diluted common share, for the first quarter 2014. This compares with net income available to common shareholders of $3.0 million, or $0.36 per diluted common share, for the fourth quarter of 2013, and net income available to common shareholders of $2.9 million, or $0.35 per diluted common share, for the first quarter of 2013. Net income available to common shareholders for the first quarter of 2014 decreased mainly due to the decrease of $926,000 in gain on sale of loans resulted from less sale of loans compared with the fourth quarter of 2014 and decreased mainly due to the increase of $1.6 million in income tax provision compared with the first quarter of 2013.

“We are very pleased to report another strong quarterly performance. We continue to experience a nice loan growth and healthy net interest margin,” said Haeyoung Cho, President and CEO. “Improvements in our credit quality provided us with two consecutive quarters of negative loan loss provision. Our core earnings remain robust and we clearly see more business opportunities in our marketplace.”

2014 FIRST QUARTER RESULTS OF OPERATION

Net Interest Income and Net Interest Margin

The following table summarizes the interest income before provision for loan losses and net interest margin.

Net interest income before provision for loan losses decreased $85,000, or 1.2%, to $7.3 million for the first quarter of 2014 compared with $7.4 million for the fourth quarter of 2013, and increased $1.2 million, or 19.5%, compared with $6.1 million for the first quarter of 2013. The decrease compared with the fourth quarter of 2013 was primarily due to two less interest accruing calendar days in the first quarter of 2014, partially offset by an increase of $79,000 in prepayment penalty fees. The $1.2 million increase compared with the first quarter of 2013 was mainly due to the increase of $108.1 million in average balance of interest earning assets to $725.8 million from $617.8 million.

Total interest expense on deposit increased $12,000, or 1.7%, to $1.2 million for the first quarter of 2014 compared with the fourth quarter of 2013. The slight increase in interest expense despite an average interest bearing deposit volume increase of $26.3 million was mainly due to a decrease of deposit costs on interest bearing deposit accounts. Compared with $1.1 million for the first quarter of 2013, total interest expense on deposit increased $134,000, or 12.7%, for the first quarter of 2014. The increase was mainly due to the increase of $91.1 million in average balance of interest bearing deposits.

The net interest margin for the first quarter of 2014 decreased 6 basis points to 4.04% compared with 4.10% for the fourth quarter of 2013 mainly due to the increase of cash balance in Federal Reserve Bank which has relatively low yielding interest income, and increased 4 basis points compared with 4.00% for the first quarter of 2013 primarily due to the decrease in deposit cost on interest bearing deposit accounts.

Noninterest Income

Noninterest income for the first quarter of 2014 decreased $1.1 million, or 34.0%, to $2.2 million compared with $3.3 million in the fourth quarter of 2013, and decreased $395,000, or 15.3%, compared with $2.6 million in the first quarter of 2013. The decrease compared to the fourth quarter of 2013 was primarily due to a decrease of $677,000 in gain on sale of mortgage loans to $45,000 from $721,000, a decrease of $249,000 in gain on sale of SBA loans to $1.2 million from $1.5 million, and a decrease of $197,000 in gain on sale of commercial loans to zero from $197,000. During the first quarter of 2014, the Company sold $15.1 million and $3.2 million of SBA loans and mortgage loans, respectively, compared with $21.2 million and $33.4 million of SBA loans and mortgage loans, respectively, during the fourth quarter of 2013.

Compared with the first quarter of 2013, noninterest income decreased mainly due to the decrease of $262,000 in gain on sale of mortgage loans to $45,000 from $306,000 and a decrease of $203,000 in miscellaneous income to $144,000 from $348,000. During the first quarter of 2013, $36.7 million of mortgage loans and $13.6 million of SBA loans were sold.

Noninterest Expense

Noninterest expense for the first quarter of 2014 decreased $122,000 to $5.8 million compared with $5.9 million in the fourth quarter 2013, and increased $856,000 compared with $4.9 million in the first quarter of 2013. The decrease compared with the fourth quarter of 2013 was mainly due to a decrease of $190,000 in loan related expenses to $163,000 from $354,000 and a decrease of $165,000 in other operating expenses to $801,000 from $998,000, partially offset by an increase of $252,000 in employee salary and benefit to $3.6 million from $3.4 million.

Compared with the first quarter of 2013, noninterest expenses for the first quarter of 2014 increased primarily due to an increase of $618,000 in employee salary and benefit expenses to $3.6 million from $3.0 million, an increase of $142,000 in other noninterest expenses to $801,000 from $659,000, an increase of $130,000 in occupancies and fixed assets expenses to $754,000 from $624,000, and $117,000 in legal and professional expenses to $331,000 from $213,000, partially offset by a decrease of $136,000 in FDIC assessment to $91,000 from $227,000. The FDIC assessment rate had been reduced due to the improvements of contributable financial ratios. Of the $618,000 in employee salary and benefit expenses increases, $329,000 was due to an increase in headcount, $86,000 was due to an increase in employee group insurance premium, and $76,000 was due to an increase in employer payroll taxes.

Income Tax Provision

The effective tax rate for the first quarter of 2014 was 39.6%, or $1.6 million, compared with 45.1%, or $2.5 million, for the fourth quarter of 2013. The effective tax rate for the fourth quarter of 2013 was higher than the first quarter of 2014 primarily due to the true-up of various factors that determined the tax benefit for the first three quarters in 2013. For the first quarter of 2013, the Company did not recognize any tax expenses in anticipation of future tax benefit resulting from the reversal of $11.3 million in valuation allowance provided against the deferred tax assets.

BALANCE SHEET SUMMARY

Total assets at March 31, 2014 increased $6.5 million, or 0.9%, to $762.5 million compared with $755.9 million at December 31, 2013, and increased $109.9 million, or 16.8%, compared with $652.5 million at March 31, 2013. The increase compared with the previous fourth quarter of 2013 was mainly due to the increase of $26.0 million in net loan receivables and an increase of $1.1 million in investment securities, partially offset by the decrease of $20.1 million in cash and due from banks. Compared with the first quarter of 2013, the increase was primarily due to the increase of $101.2 million in net loan receivables, an increase of $10.1 million in investment securities, an increase of $8.0 million in deferred tax assets due to a reversal of valuation allowance against deferred tax assets during the third quarter of 2013, an increase of $1.5 million in service assets, and an increase of $1.1 million in OREO, partially offset by a decrease of $13.9 million in cash and due from banks.

Total new loan originations during the first quarter of 2014 amounted to $78.2 million. Of the $78.2 million, home mortgage loan origination was $24.1 million and SBA loan origination was $21.1 million. Total new loan originations during the fourth quarter of 2013 amounted $113.3 million. Of the $113.3 million, home mortgage loan origination was $35.0 million and SBA loan origination was $30.3 million.

During the first quarter of 2014, the Company sold $15.1 million of SBA and $3.2 million of home mortgage loans with a gain on sale of $1.2 million and $45,000, respectively. During the same quarter, we recognized $33.7 million in paid-downs and paid-offs and charged-off $545,000. This compares with the sale of $21.2 million of SBA and $33.4 million of mortgage loans with a gain on sale of $1.5 million and $721,000, respectively, during the fourth quarter of 2013. During the same quarter, we recognized $46.4 million of paid-downs and paid-offs and $1.6 million in charge-offs.

The following table lists gross loan balance excluding unearned loan fees and allowance for loan losses by loan type:

Total deposit balance at March 31, 2014 increased $4.3 million to $678.4 million compared with $674.0 million at December 31, 2013 and increased $101.1 million compared with $577.3 million at March 31, 2013. Demand deposits to total deposits ratio was 24.9% at March 31, 2014, 24.2% at December 31, 2013, and 25.7% at March 31, 2013. The Company's net loan-to-deposit ratios were 91.4%, 88.1%, and 89.9% at March 31, 2014, December 31, 2013, and March 31, 2013, respectively.

The following table lists deposit type by category:

CAPITAL

Total shareholders' equity at March 31, 2014 increased $2.6 million to $79.1 million from $76.5 million at December 31, 2013, and increased $10.8 million from $68.4 million at March 31, 2013. The equity increase compared to the fourth quarter of 2013 was primarily due to the $2.3 million in net earnings, and the equity increase compared to the first quarter of 2013 was mainly due to the $19.9 million in net earnings, partially offset by the redemption of $8.7 million in TARP preferred stocks.

The Company’s Tier 1 leverage ratio increased to 10.55% at March 31, 2014 from 10.39% at December 31, 2013 and decreased from 10.83% at March 31, 2013 primarily due to the redemption of $8.7 million in TARP preferred stock. The ratio continues to exceed the minimum regulatory guidelines for a "well-capitalized" institution.

The following table illustrates capital ratio for Pacific City Bank and per share information for Pacific City Financial Corporation:

REDEMPTION OF TARP CPP PREFERRED STOCKS

In December 2008, the Company participated in Troubled Asset Relief Program (TARP) and The United States Treasury (“UST”) purchased $16.2 million in Company’s preferred stock Series A and immediately exercised the Series B Warrants of $810,000. The preferred stocks require quarterly dividend at an annual rate of 5.0% for Series A and 9.0% for Series B for the first five years.

On November 19, 2013, the Company redeemed $8.7 million of the $16.2 million outstanding Series A shares along with its $2.2 million in unpaid dividend by participating and winning at an auction held by the UST. The preferred stocks were redeemed at a 2.9% discount to the liquidation value of $10.8 million. The redemption was financed entirely from the Company’s retained earnings. As a result of the auction, the remaining par value of $7.5 million in Series A and $810,000 in Series B preferred stocks along with $2.0 million in total unpaid dividends and interest on the unpaid dividend were transferred to private investors.

In April 2014, the Company received regulatory approvals for additional $7.0 million to make payments on TARP preferred stocks unpaid dividend and its interest on unpaid dividend, repurchase shares, and make next quarterly dividend payment that is due. Subsequent to the approval, the Company made dividend and interest payments totaling $940,000 on the Series A and Series B preferred shares. The remaining $6.1 million will be used to repurchase 5,853 Series A shares and make $201,000 quarterly dividend payment due on May 15, 2014. After May 15, 2014 the outstanding number of Series A and Series B preferred stock will be 1,691 shares and 810 shares, respectively.

ASSET QUALITY

The provision for loan losses for the first quarter of 2014 was a reversal of $386,000 compared with the reversal of $693,000 in the fourth quarter 2013. The reversal of provision for loan losses for the first quarter 2014 was primarily due to the improvements in Company’s asset quality. The provision for loan losses for the first quarter of 2013 was $572,000.

The allowance for loan losses to total gross loans ratios was 1.88% for the first quarter of 2014 compared to 2.08% for the fourth quarter of 2013 and compared to 2.87% for the first quarter of 2013.

Nonperforming loans at March 31, 2014 decreased $1.0 million to $7.9 million compared with $8.9 million at December 31, 2013 mainly due to $545,000 in charge-offs, $289,000 in pay-offs, and transfer of $217,000 to OREO through foreclosure, partially offset by the addition of $260,000 to nonperforming loans.

The nonperforming assets to total assets ratio decreased 11 bps to 1.18% at March 31, 2014 from 1.29% at December 31, 2013, but increased 6 bps from 1.12% at March 31, 2013. The net value of OREO portfolio at March 31, 2014 increased to $1.2 million compared with $891,000 in the fourth quarter of 2013 and increased $1.1 million compared with $85,000 in the first quarter of 2013.

The following tables provide details of nonperforming assets, nonperforming loans, classified assets and classified loans.

About Pacific City Financial Corporation

Headquartered in Los Angeles, California, Pacific City Financial Corporation is the parent company of Pacific City Bank, a full-service commercial bank with nine branch offices and seven loan production offices in Lynwood and Bellevue, Washington; Chicago, Illinois; Annandale, Virginia; Atlanta, Georgia; San Francisco, California; and Palisades Park, New Jersey. Pacific City Bank specializes in commercial banking for small to medium-size businesses by providing commercial real estate loans, small business loans and line of credit, trade finance loans, auto loans, residential mortgage loans, and SBA loans. Pacific City Bank serves a diverse customer base through its branches in the Greater Los Angeles Area and its Loan Production Offices in six states.

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