CTBK City Bank (MM)

City Bank (NASDAQ:CTBK) today announced for the quarter ended September 30, 2008, a net loss of $10.96 million, or $.69 per diluted share due to a $28.00 million provision for loan losses. The Bank also announced earnings of $4.04 million for the nine months ended September 30, 2008, reflecting a decrease of 87.09% from $31.31 million for the same period in 2007 The Bank�s diluted net income per share of $0.26 for the nine months ended 2008 reflects a decrease of 86.80% from $1.97 for the same period in 2007. City Bank�s President and CEO Conrad Hanson noted, �The banking industry as a whole is in a period of severe financial distress which is unprecedented in the Bank�s 34-year history. The 2008 housing slump is the worst this country has ever experienced and the lack of liquidity and confidence in the credit markets are clearly a drag on the Bank�s residential real estate loans. For the quarter ended September 30, 2008, the Bank has experienced a significant increase in nonperforming assets which reflects the inability of home builders to sell product in this period of declining demand. One of the principal reasons for the declining demand for new homes has been the lack of mortgage financing as result of the nationwide turmoil in the housing markets. The combination of these forces coupled with the Bank�s focus on the residential real estate construction lending have led to significant increases in nonperforming loans and an unprecedented loan loss provision of $28 million for the quarter ended September 30, 2008. This resulted in a significant decline in the Bank�s reported earnings as reflected in the current quarter�s net loss - the first ever reported in the Bank�s 34-year history. City Bank, despite being impacted by these industry wide problems has always expressly provided for the possibility of such a downturn by maintaining a fortress balance sheet with respect to the Bank�s capital. As of September 30, 2008, City Bank�s Total Risk-Based Capital totaled $222.98 million. This amount is almost double the regulatory requirement of $127.05 million for the Bank to be categorized as �well-capitalized� (the highest rating possible). The following is the Bank�s Regulatory Capital and Ratios as of September 30, 2008: � Tier 1 (Core) Capital � Tier 2 (Total) Capital � Leverage Capital Amount � Ratio Amount � Ratio Amount � Ratio � Actual at September 30, 2008 $ 206,826 16.28 % $ 222,983 17.55 % $ 206,826 16.00 % � Regulatory minimum ratio for �Well Capitalized� purposes $ 76,229 6.00 % $ 127,049 10.00 % $ 64,650 5.00 % Net interest income after provision for credit losses was $17.59 million for the first nine months of 2008 compared to $60.68 million for the same period in 2007, reflecting a decrease of 71.02%. Continued weakness in the housing markets, combined with a general slowdown in the local economy, has resulted in the decline in City Bank�s 2008 earnings. Contributing to the decline in net interest income was the increase in loans being placed on non-accrual status for which interest accrued in the amount of $3.17 million had been reversed from income. During the first nine months of 2008, the Bank recorded a provision for credit losses of $33.10 million as compared to $825 thousand for the same period in the prior year. The increase in the allowance for credit losses was in response to an increase in specific losses that have been identified and problem real estate construction loans with loss potential, as well as the increased risk caused by the national economic crisis on the Bank�s overall portfolio. Almost all businesses and consumers are being impacted by the economy and the Bank is working with borrowers to minimize the actual losses in the loan portfolio. The Bank�s actual net charge-offs for the nine months ended September 30, 2008 were $6.09 million compared to $839 thousand in the prior year. In spite of the difficult market conditions, the Bank maintains an excellent efficiency ratio of 27.89% which makes City Bank almost twice as efficient as the industry which has an average efficiency ratio of 57.20% (as reported in the FDIC Quarterly Banking Profile for 6/30/08). Conrad Hanson said, �City Bank has historically been a very efficient bank with a low cost of operations. This has contributed to our outstanding profitability, and along with our capital, will be an added strength as we continue to work through this difficult economic situation.� Despite these unprecedented circumstances, the Bank is still able to maintain a net interest margin of 5.41% and achieve earnings of $4.04 million for the nine months ended September 30, 2008. Year-to-Date Highlights (In thousands, except ratios) � � Sept. 30, 2008 (9 months) � June 30, 2008 (6 months) � March 31, 2008 (3 months) � Sept. 30, 2007 (9 months) Total Assets $ 1,324,334 $ 1,291,975 $ 1,309,029 $ 1,179,272 Total Loans $ 1,193,242 $ 1,173,911 $ 1,213,422 $ 1,103,690 Net Income $ 4,041 $ 15,004 $ 9,685 $ 31,309 Nonperforming Assets $ 199,186 $ 103,360 $ 59,306 $ 9,825 Net Interest Margin 5.41 % 5.67 % 6.09 % 7.42 % Return on Average Assets (ROA) 0.63 % 2.37 % 3.11 % 3.73 % Return on Average Equity (ROE) 2.46 % 13.79 % 18.09 % 20.27 % Average Equity to Average Assets 17.16 % 17.15 % 17.21 % 18.42 % Loan Loss Reserve as a percentage of Total Loans 3.21 % 1.24 % .96 % .93 % Efficiency Ratio 27.89 % 26.33 % 24.98 % 22.26 % Total Shareholders� Equity $ 206,893 $ 220,256 $ 217,393 $ 217,408 Tier 1 Leverage Ratio 16.00 % 17.04 % 17.45 % 18.33 % Tier 1 Risk-Based Capital Ratio 16.28 % 17.80 % 17.43 % 19.11 % Total Risk-Based Capital Ratio 17.55 % 18.98 % 18.36 % 20.02 % Net loss for the three months ended September 30, 2008 was $10.96 million compared to net income of $10.38 million in the prior year primarily due to a higher provision for loan losses of $28.00 million compared to $675 thousand for the same quarter of 2007. On a diluted per share basis, net income was down 206.15% to $(0.69) from $0.65 in the comparable period in 2007. Net interest income(loss) after provision for credit losses was $(12.83) million for the three months ended September 30, 2008 compared to $20.03 million for the same period in 2007, reflecting a decrease of 164.07%. During this housing downturn, the Bank�s borrowers, including residential construction builders, are experiencing slowing home sales that are contributing to certain borrowers� inability to perform under the terms of the loan agreements. This has resulted in a significant increase in the Bank�s nonperforming loans and the net loss for this quarter. The Bank is working diligently with its borrowers to collectively address any loan issues and in some cases foreclosure (or a deed in lieu of foreclosure) is the ultimate course of action. The Bank�s unusually high level of capital provides strong support and flexibility in working through this economic downturn. Quarter-to-Date Highlights (In thousands, except ratios) � � Sept. 30, 2008 � June 30, 2008 � March 31, 2008 � Sept. 30, 2007 Total Assets $ 1,324,334 $ 1,291,975 $ 1,309,029 $ 1,179,272 Total Loans $ 1,193,242 $ 1,173,911 $ 1,213,422 $ 1,103,690 Net Income (Loss) $ (10,963 ) $ 5,319 $ 9,685 $ 10,378 Nonperforming Assets $ 199,186 $ 103,360 $ 59,306 $ 9,825 Net Interest Margin 4.88 % 5.25 % 6.09 % 7.25 % Return on Average Assets (ROA) (3.38 )% 1.65 % 3.11 % 3.60 % Return on Average Equity (ROE) (19.71 )% 9.63 % 18.09 % 19.38 % Average Equity to Average Assets 17.17 % 17.09 % 17.21 % 18.57 % Result of Operations Interest income for the first nine months of 2008 was down 9.35% from the comparable period in 2007. As a result of the weakening residential real estate market, the Bank�s nonperforming assets increased from $9.84 million at September 30, 2007 to $34.49 million at December 31, 2007 to $199.19 million at September 30, 2008. Accrued interest of $3.17 million was reversed from income during the nine months ended September 30, 2008 due to the transfer of nonperforming 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 2007 (on which the majority of the Bank�s interest-earning assets are priced) as evidenced by the decline in the yield on the interest earning assets year over year. The average yield on loans for the nine months ended September 30, 2008 was 9.01%, down from 11.24% for the same period in 2007, and net interest margin decreased to 5.41% compared to 7.42% in the same period in the prior year. The slowdown in the housing market has proven to be particularly challenging, and the Bank expects high loan delinquencies, nonperforming loans and potential charge-offs to continue for the remainder of the year and likely into next year. However, given the Bank�s loan loss reserve, strong capital position and its seasoned management team, the Bank is well positioned to work through problem credits and to minimize losses as has been demonstrated throughout the Bank�s 34-year history. Interest expense for the nine months ended September 30, 2008 increased 7.97% to $31.57 million over the $29.24 million recorded in the comparable period in 2007. Contributing to the increase were higher total deposits to fund loan growth and a significant increase in competition for deposits among banks, despite the rapid drop in the short term interest rates in the latter part of 2007. The average cost of deposits and borrowed funds for the nine months ended September 30, 2008 decreased to 4.14%, down 36 basis points from 4.50% for the same period in 2007, reflecting a lower rate environment. Average time deposits and borrowed funds for the nine months ended September 30, 2008 were $1.02 billion, a 17.35% increase over the $866.60 million average for the comparable period in 2007. Non-interest income of $3.89 million reflects a net increase of $1.72 million or 79.64% for the nine months ended September 30, 2008 over the nine months ended September 30, 2007. The majority of this increase was due to a pre-tax gain of $1.22 million on the partial redemption of the Bank�s equity interest in VISA Inc. (NYSE: V).This redemption reflects 38.66% of the Bank�s ownership position in VISA. Another major contribution to non-interest income was an increase of $787 thousand in net gains from sale of loans compared to the same period of 2007. SBA loan servicing income and service charges on deposit accounts decreased by $55 thousand and $24 thousand, respectively, compared to the prior period in 2007. There was also a decrease in non-interest income of $154 thousand due to the discontinuation of the Bank�s Investment Services department. Non-interest expense of $15.22 million in the nine months of 2008 reflects a net increase of 7.38% or $1.05 million over the same period in 2007. The majority of the increase relates to foreclosed real estate expenses which increased by $978 thousand over the same time frame in 2007. FDIC insurance expense increased by $335 thousand as compared to the same period in 2007 and legal, collection and appraisal expenses increased by $179 thousand, $144 thousand, and $72 thousand respectively. The Bank also recorded a net loss on sale of foreclosed real estate of $219 thousand for the nine months ended September 30, 2008. Losses related to the sales of mortgage loans into the secondary market for the first nine months of September 2008 were $110 thousand. Occupancy expense increased by $101 thousand and salary and employee benefits also decreased by $829 thousand compared to the same period in 2007. During the first nine months of 2008 there was also a decrease in state and local tax expense of $367 thousand. At September 30, 2008, total assets were $1.32 billion, up 12.30% over September 30, 2007. Asset growth since December 31, 2007 was $85.30 million or 6.88%. Loans grew 8.33% to $1.20 billion at September 30, 2008 compared to $1.11 billion at September 30, 2007. Loan growth since December 31, 2007 was $37.54 million or 3.13%. At September 30, 2008, deposits increased 21.91% to $1.01 billion compared to $827.23 million at September 30, 2007 and 16.66% since December 31, 2007. City Bank�s return on average assets for the nine months ended September 30, 2008 was 0.63% compared to 3.73% for the same period in 2007. Return on average equity was 2.46% for the nine months ended September 30, 2008, compared to 20.27% for the same period in 2007. The ratio of average equity to average assets (Tier 1 Capital) for the nine months ended September 30, 2008 was 17.16% compared to 18.42% for the same period in 2007. The Tier 1 Capital Ratio decreased slightly due to the increase in the Bank�s total assets for the period ended September 30, 2008. The Bank also declared a regular quarterly cash dividend of $0.15 per share during third quarter of 2008. Forward-Looking Statements The previous discussion contains a review of City Bank�s operating results and financial condition for the three and nine months ended September 30, 2008 and 2007. 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, 2007. 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. City Bank has been consistently recognized as one of the top performing banks in Washington State as well as nationally. � � � � � � � Selected Financial Highlights (unaudited) (In thousands, except per share data) Three months ended September Nine months ended September Income Statement Data � 2008 � � � 2007 � � % Change � � � 2008 � � � 2007 � � % Change � Interest income $ 25,236 $ 31,084 -18.81 % $ 82,260 $ 90,749 -9.35 % Interest expense 10,069 10,379 -2.99 % 31,574 29,243 7.97 % Net interest income 15,167 20,705 -26.75 % 50,686 61,506 -17.59 % Provision for credit losses 28,000 675 4048.15 % 33,100 825 3912.12 % Net interest income (loss) after provision for credit losses (12,833 ) 20,030 -164.07 % 17,586 60,681 -71.02 % Other noninterest income 1,145 604 89.57 % 3,891 2,166 79.64 % Other noninterest expense 5,147 4,502 14.33 % 15,222 14,176 7.38 % Income (loss) before income taxes (16,835 ) 16,132 -204.36 % 6,255 48,671 -87.15 % Provision (benefit) for income taxes (5,872 ) 5,754 -202.05 % 2,214 17,362 -87.25 % Net Income (Loss) $ (10,963 ) $ 10,378 -205.64 % $ 4,041 $ 31,309 -87.09 % � Share Data Actual shares outstanding 15,764 15,727 0.24 % Earnings (Loss) Per Share: Basic earnings (loss) per common share ($0.69 ) $ 0.66 -204.55 % $ 0.26 $ 1.99 -86.93 % Diluted earnings (loss) per common share ($0.69 ) $ 0.65 -206.15 % $ 0.26 $ 1.97 -86.80 % Book value per common share $ 13.09 $ 13.82 -5.31 % Basic average shares outstanding 15,764 15,726 0.24 % 15,760 15,708 0.33 % Fully diluted average shares outstanding 15,764 15,853 -0.56 % 15,774 15,854 -0.50 % Dividends paid per share $ 0.15 $ 0.15 0.00 % $ 0.45 $ 0.45 0.00 % � Balance Sheet Data (at period end) Investment securities $ 14,333 $ 14,692 -2.44 % Loans held for sale 6,057 3,344 81.13 % Loans, net of unearned income 1,193,242 1,103,690 8.11 % Allowance for credit losses 38,274 10,272 272.61 % Total assets 1,324,334 1,179,272 12.30 % Total deposits 1,008,508 827,231 21.91 % Liabilities related to discontinued operations 840 882 -4.76 % Total Shareholders' Equity 206,893 217,408 -4.84 % � Selected Ratios Return on average shareholders' equity -19.71 % 19.38 % -201.73 % 2.46 % 20.27 % -87.88 % Average shareholders' equity to average assets 17.17 % 18.57 % -7.53 % 17.16 % 18.42 % -6.86 % Return on average total assets -3.38 % 3.60 % -194.07 % 0.63 % 3.73 % -83.06 % Net interest spread 4.23 % 6.25 % -32.32 % 4.63 % 6.44 % -28.11 % Net interest margin 4.88 % 7.25 % -32.69 % 5.41 % 7.42 % -27.09 % Efficiency ratio 31.55 % 21.12 % 49.34 % 27.89 % 22.26 % 25.27 % � Asset Quality Ratios Allowance for credit losses $ 38,274 $ 10,272 272.61 % Allowance to ending total loans 3.21 % 0.93 % 244.64 % Non-performing assets: Non-accrual $ 109,303 $ 9,678 1029.40 % Impaired loans still accruing $ 19,660 $ 11 178627.27 % 90 days past due and still accruing $ 1,510 $ 147 927.21 % Foreclosed real estate $ 68,713 $ - 100.00 % Nonperforming assets to total assets 15.04 % 0.83 % 1703.25 % Net (charge-offs) recoveries $ (6,095 ) $ (839 ) 626.46 % Net loan charge-offs (annualized) to average loans 0.68 % 0.06 % 1032.38 %