CTBK City Bank (MM)

City Bank (NASDAQ:CTBK) today announced a net loss of $22.76 million for the quarter ended June 30, 2009, or $1.44 per diluted share compared to a reported net income of $5.32 million, or $.34 per diluted share for the same quarter in the prior year. The Bank also announced a net loss of $30.78 million or $1.95 per share for the six months ended June 30, 2009 compared to a net income of $15.00 million or $.95 per share for the same period in 2008. The primary causes for the net loss were a non-cash provision for loan losses of $11.25 million and non-cash valuation adjustment for foreclosed real estate of $5.94 million for the three months ended June 30, 2009. These non-cash charges, totaling $17.19 million, represent the Bank’s estimate of changes in the appraised value of loan collateral and foreclosed real estate due to the ongoing disruptions to the normal level of market activity in residential construction sales. As a lender focused on residential construction, the amount of “distressed selling” of real estate has significantly reduced the appraised value of residential building lots. The Bank’s strategy is an orderly sale of loan collateral by building houses and selling completed homes rather than bulk sales of building lots that currently have very low appraised values. The net loss was also impacted by a deferred tax valuation allowance of $7.49 million, which limited the effective tax benefit rate to 4.83% instead of the statutory rate of 35%.

Conrad Hanson, President and CEO commented, “The Bank is executing on our plan to reduce non-performing assets and build liquidity as we reduce the total asset size of our balance sheet. We are prudently financing the construction of homes in housing developments where sales are actively occurring. We are not planning on selling building lots where the appraised value is significantly below the value of the land with a completed house.”

Balance Sheet Summary (Amount in Thousands)

   

June 30

2009

 

March 31

2009

 

December 31

2008

 

June 30

2008

Total Assets   $ 1,289,818   $ 1,370,683   $ 1,325,541   $ 1,292,300 Total Loans, excluding mortgage loans held for sale   $ 927,982   $ 1,029,959   $ 1,064,080   $ 1,173,911 Total Cash and Federal Funds   $ 206,515   $ 185,116   $ 111,632   $ 47,702 Non-Performing Assets   $ 611,112   $ 607,170   $ 601,193   $ 103,854

Three Months Summary (In thousands, except ratios)

    June 30, 2009   June 30, 2008 Net Income (Loss)   $ (22,756 )   $ 5,319   Net Interest Margin     .27 %     5.25 % Non-cash loan loss provisions   $ 11,250     $ 4,600   Non-cash valuation adjustments to foreclosed real estate   $ 5,939     $ 278   Return on Average Assets (ROA)     -6.93 %     1.65 % Return on Average Equity (ROE)     -70.78 %     9.63 % Average Equity to Average Assets     9.80 %     17.09 %

Net loss for the quarter ended June 30, 2009 was $22.76 million, or $1.44 per diluted share. The primary causes for the net loss were a non-cash provision for loan losses of $11.25 million and a non-cash valuation adjustment for foreclosed real estate of $5.94 for the three months ended June 30, 2009. The provision for loan loss for the quarter was $11.25 million compared to $4.60 million for the same quarter of 2008. The nonperforming assets expense for the quarter ended June 30, 2009 was $9.13 million, of which $5.94 million was attributable to non-cash valuation adjustment for foreclosed real estate, compared to $577 thousand for the same quarter in the prior year of 2008. On a diluted per share basis, net loss was $1.44 per share compared to net income of $.34 in the comparable period in 2008. Net interest loss after provision for credit losses was a loss of $6.42 million for the three months ended June 30, 2009 compared to net interest income of $12.16 million for the same period in 2008.

Six Months Summary (In thousands, except ratios)

    June 30, 2009   June 30, 2008 Net Income (Loss)   $ (30,780 )   $ 15,004   Net Interest Margin     .68 %     5.67 % Non-cash loan loss provisions   $ 16,876     $ 5,100   Non-cash valuation adjustments to foreclosed real estate   $ 7,316     $ 392   Return on Average Assets (ROA)     -4.66 %     2.37 % Return on Average Equity (ROE)     -45.75 %     13.79 % Average Equity to Average Assets     10.19 %     17.15 %

During the period from July 1, 2008 to date, the Bank experienced a significant increase in nonperforming assets primarily as a result of the reduced ability of home builders to sell inventory in this recessionary period of declining demand. City Bank defines nonperforming assets to include accruing loans past due ninety days or more, non-accrual loans, including loans where the borrower is making cash payments of interest that we apply to principal in accordance with GAAP, loans which have been restructured to provide a reduction in or deferral of interest or floor rates or principal for reasons related to the debtors financial difficulties, potential problem loans and loans to related borrowers, and foreclosed real estate. During the 4th quarter of 2008 and during the first six months of 2009 there was a significant downturn in local economic conditions due to the national recession and the banking crisis. These forces coupled with the Bank’s focus on residential real estate construction lending have led to significant increases in nonperforming loans and a higher provision for loan losses of $16.88 million for the six months ended June 30, 2009, compared to $5.10 million for the same period in the prior year. As of June 30, 2009, nonperforming assets totaled $611.11 million, which represented 47.38% of total assets. The total nonperforming assets balance reflects partial charge-offs to adjust loan balances to collateral value. As of June 30, 2009, the allowance for loan losses was $46.93 million, which represents 5.06% of total loans compared to 1.24% in the second quarter of 2008.

Home Sales in Excess of $250 Million Year-to-Date

Conrad Hanson, President and CEO commented, “We are encouraged by the volume of the sales of homes, by our borrowers and by the Bank, both unit and dollar volumes during the first six plus months of 2009.”

As the table below indicates the Bank has been conducting an orderly and aggressive effort to sell residential properties securing the Bank’s loans, which is already showing positive results. Since the beginning of January up through July 24, 2009, 739 homes representing $220 million have been sold and paid-off and 108 properties have pending sales (signed agreements with earnest money deposits) totaling $34.60 million for closing dates primarily in July and August. The combination of paid and pending sales totaled 847 homes representing $254.24 million in original construction loan balances. The average realized loss on these 847 transactions is 9 percent of the original loan principal. The average realized losses on the transactions that were short sales are 14 percent of the original loan principal. These loss percentages are consistent with the level of loan loss reserves established by the Bank in 2008 and 2009. These realized losses are not incremental to the loan loss provisions made in 2008 and 2009, but represent the ultimate resolution of these loans to net cash proceeds.

  Q1 Actual   Q2 Actual   July MTD   Pending   Year-to-date   Houses sold 287 373 79 108 847 Average construction loan balance $ 279,888 $ 311,379 $ 293,245 $ 320,455 $ 300,973   Original construction loan balance – All Sales ($ millions) $ 80.33 $ 116.14 $ 23.17 $ 34.60 $ 254.24   Original construction loan balance –short sales ($ in Million) $ 163.50   Total loss of loan principal

($ million)

$ 22.34   Average realized loss on all sales 9.00 % Average realized loss on short sales 14.00 %

Capital Ratios

City Bank, despite being impacted by the industry wide problems and the economic downturn, has always expressly provided for the possibility of such an economic downturn by historically maintaining capital at significantly higher than the average levels required for banks in the United States. The following table summarizes the Bank’s Shareholders’ Equity and Allowance for Credit Losses, as reported on a GAAP basis:

    June 30, 2009   December 31, 2008   June 30, 2008               Shareholders’ Equity ($000’s)   $ 110,303   $ 141,157   $ 220,255 Allowance for Credit Losses ($000’s)   $ 46,934   $ 34,990   $ 14,529     $ 157,237   $ 176,147   $ 234,784

The above table indicates that, the Bank’s Shareholders’ Equity has been reduced by the impact of the net loss in the first six months of 2009 and an unprecedented loan loss provision of $119.05 million in 2008. However, at the same time, the Bank built up the allowance for credit losses to $46.93 million from $14.53 million as of the same period in 2008. The combined total of Shareholders’ Equity and the Allowance for Credit Losses for the six months of 2009, December 31, 2008 and June 30, 2008 are $157.24 million, $176.15 million and $234.78 million, respectively. During the six months ended June 30, 2009, the Bank recorded net loan charge-offs of $4.03 million compared to $1.84 million for the same period in 2008.

The following is the Bank’s Regulatory Capital and Ratios as of June 30, 2009, March 31, 2009, December 31, 2008 and June 30, 2008: (Amounts in thousands)

  Leverage Capital   Tier 1 (Core) Capital   Tier 2 (Total) Capital   Amount   Ratio Amount   Ratio Amount   Ratio   Actual at June 30, 2009 $ 110,209 8.67 % $ 110,209 10.10 % $ 124,262 11.39 % Actual at March 31, 2009 $ 132,978 10.36 % $ 132,978 11.13 % $ 148,222 12.41 % Actual at December 31, 2008 $ 141,000 10.72 % $ 141,000 11.61 % $ 158,424 12.88 % Actual at June 30, 2008 $ 220,150 17.04 % $ 220,150 17.80 % $ 234,680 18.97 %

Liquidity and Cash Flow

At June 30, 2009 the Bank had Cash Equivalents (in the form of Cash, Cash in Banks, Interest Bearing Accounts in Banks and Federal Funds Sold) which totaled $206.52 million compared to $47.70 million at June 30, 2008. The following table summarizes the Bank’s liquid assets, which are approximately $300 million that can be realized in 90 days or less:

Liquid Assets:   Amount (in millions)   Cash and federal funds sold $ 206 Mortgage loans held for sale $ 24 Available for sale securities $ 22 Pending home sales (estimated net cash proceeds) $ 33 Federal income tax refund for 2008 NOL $ 18 Total $ 303

During the three and six month periods ended June 30, 2009 the Bank’s cash flow was as shown below on a summary basis:

• Net cash (used in) operating activities was ($2.99 million) and ($16.87 million), respectively. This includes cash used to originate loans held for sale of ($16.49 million) during the six month period.
• Net cash provided by investing activities was $82.27 million and $116.90 million, respectively. This is primarily the cash proceeds from the sale of loan collateral and foreclosed real estate net of construction loan disbursements to complete houses for sale.
• Net cash (used in) financing activities was ($57.88 million) and ($5.15 million), respectively. This includes the repayment of brokered deposits of $161 million during the six month period.
• Net increase in cash was $21.40 million and $94.88 million for the three and six month periods, respectively

Result of Operations

Interest income for the three and six months ended June 30, 2009 was down 62.17% and 58.50% from the comparable period in 2008. As a result of the weakening residential real estate market, the Bank’s nonperforming assets increased from $103.85 million at June 30, 2008, to $601.19 million at December 31, 2008 and $611.11 million at June 30, 2009. Accrued interest of $2.14 million was reversed from income for the six months ended June 30, 2009 due to the transfer of loans to non-accrual status. Also contributing to the decrease in interest income was the decline in short term interest rates during the latter part of 2008 (the majority of the Bank’s interest-earning assets are variable rate with floors) as evidenced by the decline in the yield on the interest earning assets year over year. The average yield on loans for the three and six months ended June 30, 2009 were 4.01% and 4.44%, down from 8.81% and 9.34% for the same period in 2008. Net interest margin for the three and six months ended June 30, 2009 decreased to .27% and .68% compared to 5.25% and 5.67% in the same periods in the prior year.

Interest expense for the three and six months ended June 30, 2009 decreased to $9.51 million and $19.46 million compared to $10.56 million and $21.51 million recorded in the comparable periods in 2008. The average cost of deposits and borrowed funds for the three and six months ended June 30, 2009 decreased to 3.20% and 3.26% compared to 4.10% and 4.27% for the same period in 2008, reflecting a lower interest rate environment. Average interest bearing deposits and borrowed funds for the six months ended June 30, 2009 were $1.20 billion, an 18.26% increase over the $1.01 billion average for the comparable period in 2008.

Non-interest income for the three and six months ended June 30, 2009 reflects a net decrease of $120 thousand and $1.16 million compared to the same periods in 2008. The majority of this decrease was due to a non recurring pre-tax gain of $1.22 million on the partial redemption of the Bank’s equity interest in VISA Inc. (NYSE: V) in the first quarter of 2008. Non-interest income excluding VISA, Inc. reflected a net gain of $58 thousand primarily due to the net gains from sale of foreclosed real estate.

Non-interest expense for the three and six months ended June 30, 2009 were $14.01 million and $25.00 million compared to $5.13 million and $10.08 million for the same periods in 2008. The majority of the increase relates to losses and expenses on nonperforming loans and foreclosed real estate, which increased by $13.27 million for the six months ended June 30, 2009 compared to the same period in 2008. For the six months ended June 30, 2009, audit expense increased by $631 thousand due to increased review of nonperforming assets. FDIC insurance expense increased by $1.61 million for the six months ended June 30, 2009, compared to the same period in 2008, which is a function of the Bank’s increased level of deposits and the higher rate of assessment applied to all banks as a result of the national banking crisis. Offsetting the increases was a decrease in salary and employee benefits expense by $1.36 million for the six months ended June 30, 2009 compared to the same period in 2008, due to the reduction in the level of incentive compensation.

The Bank’s effective income tax benefit rate for the three and six months ended June 30, 2009 was 4.83% and 14.70%, due to a deferred tax valuation allowance of $7.49 million established in the second quarter of 2009. At June 30, 2009 the Bank reported a federal income tax receivable of $26.02 million and a net deferred tax asset of $15.07 million.

At June 30, 2009, total assets were $1.30 billion, up .19% over June 30, 2008 due to the substantial increase in the on balance sheet liquidity of $206.52 million. Total loans decreased by 19.36% to $951.66 million at June 30, 2009 compared to $1.18 billion at June 30, 2008. At June 30, 2009, deposits increased 14.55% to $1.09 billion compared to $955.18 million at June 30, 2008.

City Bank’s return on average assets for the three and six months ended June 30, 2009 were -6.93% and -4.66% compared to 1.65% and 2.37% for the same period in 2008. Return on average equity for the three and six months ended June 30, 2009 were -70.80% and -45.75% compared to 9.63% and 13.79% for the same periods in 2008. The ratio of average equity to average assets (Tier 1 Capital) for the three and six months ended June 30, 2009 were 9.79% and 10.19% compared to 17.09% and 17.15% for the same periods in 2008.

Forward-Looking Statements

The previous discussion contains a review of City Bank’s operating results and financial condition for the three and six months ended June 30, 2009 and twelve months ended December 31, 2008. The discussion may contain certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those stated, including, but not limited to, the Bank’s inability to generate increased earning assets, sustain credit losses, maintain adequate net interest margin, control fluctuations in operating results, maintain liquidity to fund assets, retain key personnel, and other risks detailed from time to time in the Bank’s filings with the Federal Deposit Insurance Corporation, including our Annual Report on Form 10-K for the period ended December 31, 2008. Readers are cautioned not to place undue reliance on these forward-looking statements.

City Bank is a state-chartered commercial bank founded in 1974 and headquartered in Lynnwood, Washington. The Bank is publicly traded (NASDAQ: CTBK) and many of the stockholders are local individuals. Eight banking offices serve both Snohomish and North King counties. Three mortgage loan offices serve Snohomish, King, Pierce and Clark counties. City Bank provides a wide range of banking services for business and individuals, including loans for residential construction, land development, mortgage, commercial, Small Business Administration, consumer, and all types of deposits as well as other general banking services.

Selected Financial Highlights (unaudited)             (In thousands, except per share data) Three months ended June Six months ended June Income Statement Data   2009     2008   % Change     2009     2008   % Change   Interest income $ 10,335 $ 27,318 -62.17 % $ 23,663 $ 57,024 -58.50 % Interest expense 9,508 10,560 -9.96 % 19,455 21,505 -9.53 % Net interest income 827 16,758 -95.07 % 4,208 35,519 -88.15 % Provision for credit losses 11,250 4,600 144.57 % 16,876 5,100 230.90 % Net interest income (loss) after provision for credit losses (10,423 ) 12,158 -185.73 % (12,668 ) 30,419 -141.65 % Other noninterest income 519 640 -18.91 % 1,586 2,746 -42.24 % Cash expense related to nonperforming assets 3,191 299 967.22 % 6,812 469 1352.45 % Valuation Adjustment related to nonperforming assets 5,939 278 2036.33 % 7,316 392 1766.33 % Other noninterest expense 4,876 4,556 7.02 % 10,874 9,683 12.30 % Income (Loss) before income taxes (23,910 ) 7,964 -400.23 % (36,084 ) 23,090 -256.28 % Provision (benefit) for income taxes (1,154 ) 2,645 -143.63 % (5,304 ) 8,086 -165.59 % Net Income (Loss) $ (22,756 ) $ 5,319 -527.82 % $ (30,780 ) $ 15,004 -305.15 %   Share Data Actual shares outstanding 15,764 15,764 0.00 % Earnings Per Share: Basic earnings per common share ($1.44 ) $ 0.34 -523.53 % ($1.95 ) $ 0.95 -305.26 % Diluted earnings per common share ($1.44 ) $ 0.34 -523.53 % ($1.95 ) $ 0.95 -305.26 % Book value per common share $ 7.00 $ 13.97 -49.91 % Basic average shares outstanding 15,764 15,764 0.00 % 15,764 15,759 0.03 % Fully diluted average shares outstanding 15,764 15,770 -0.04 % 15,764 15,780 -0.10 % Dividends paid per share $ 0.00 $ 0.15 -100.00 % $ 0.00 $ 0.30 -100.00 %   Balance Sheet Data (at period end)   Fed Funds Sold and Cash and Due From Bank $ 206,515 $ 47,702 332.93 % Investment securities 22,345 14,391 55.27 % Loans held for sale 23,679 6,373 271.55 % Total on balance sheet liquidity $ 252,539 $ 68,466 268.85 % Loans, net of unearned income 927,982 1,173,911 -20.95 % Allowance for credit losses 46,934 14,530 223.01 % Total assets 1,289,818 1,292,300 -0.19 % Total deposits 1,094,151 955,179 14.55 % Total Shareholders' Equity 110,303 220,256 -49.92 %   Three months ended June Six months ended June Cash Flow Statement Data   2009     2008   % Change     2009     2008   % Change   Net cash provided by (used in) operating activities (2,993 ) 3,021 (16,866 ) 10,376 -262.55 % Net cash provided by (used in) investing activities 82,274 2,294 116,901 (57,130 ) -304.62 % Net cash provided by (used in) financing activities   (57,882 )   (17,074 )   (5,152 )   42,872   -112.02 % Net increase (decrease) in cash and federal funds sold 21,399 (11,759 ) 94,883 -3,882 -2544.18 %   Cash and federal funds sold at beginning of period   185,116     59,461     111,632     51,584   116.41 % Cash and federal funds sold at end of period   206,515     47,702     206,515     47,702   332.93 %   Selected Ratios Return on average shareholders' equity -70.80 % 9.63 % -835.19 % -45.75 % 13.79 % -431.69 % Average shareholders' equity to average assets 9.79 % 17.09 % -42.69 % 10.19 % 17.15 % -40.61 % Return on average total assets -6.93 % 1.65 % -521.33 % -4.66 % 2.37 % -297.01 % Net interest spread 0.14 % 4.46 % -96.86 % 0.54 % 4.83 % -88.82 % Net interest margin 0.27 % 5.25 % -94.86 % 0.68 % 5.67 % -88.01 % Efficiency ratio 1037.91 % 28.62 % 3526.52 % 431.17 % 26.33 % 1537.72 % Effective tax expense (benefit) rate -4.83 % 33.21 % -114.53 % -14.70 % 35.02 % -141.97 % Asset Quality Ratios Allowance for credit losses $ 46,934 $ 14,530 223.01 % Allowance to ending total loans 5.06 % 1.24 % 308.62 % Non-performing assets: Non-accrual $ 418,287 $ 63,178 562.08 % 90 days past due and still accruing $ 3,659 $ 11 33163.64 % Impaired loans still accruing $ 89,560 $ 494 18029.57 % Foreclosed real estate $ 99,606 $ 40,171 147.95 % Total Non-performing assets $ 611,112 $ 103,854 488.43 % Non-performing assets to total assets 47.38 % 8.04 % 489.57 % Net (charge-offs) recoveries $ (4,932 ) $ (1,839 ) 168.19 % Net loan charge-offs (annualized) to average loans 0.95 % 0.31 % 210.02 %