CTBK City Bank (MM)

City Bank (NASDAQ:CTBK) today announced a net loss of $35.56 million for the quarter ended September 30, 2009, or $2.26 per diluted share, compared to a reported net loss of $10.96 million, or $.69 per diluted share, for the same quarter in the prior year. The Bank also announced a net loss of $66.34 million, or $4.21 per share, for the nine months ended September 30, 2009, compared to a net income of $4.04 million, or $.26 per share, for the same period in 2008. The primary causes for the net loss were a reduction in interest income of $16.73 million, a non-cash provision for loan losses of $25.42 million and non-cash valuation adjustment for foreclosed real estate of $669 thousand for the three months ended September 30, 2009. The non-cash charges, totaling $26.09 million, represent the Bank’s estimate of changes in the appraised value of loan collateral and foreclosed real estate due to the ongoing disruptions in residential construction sales. The current nine-month period net loss was also impacted by a deferred tax valuation allowance of $21.74 million, which limited the effective tax benefit rate to 7.83% instead of the statutory rate of 35%. The prior year reported amount included income tax benefits at the statutory rate of 35%.

Martin Heimbigner, Lead Independent Director, commented, “The Bank’s loss for the quarter and the nine months was impacted by ongoing uncertainty in the market for residential building lots. We are selling very few building lots because of the incredibly low market prices right now. Instead, the Bank is strategically financing certain builders to complete houses in partially finished developments and sell them in what has been a slightly improved market for homes in recent months. In accordance with accounting requirements, we are required to carry residential building lots at distressed market prices until we sell the completed houses. A percentage of the non-cash loss provisions attributable to the write down of lot prices may be recovered in future quarters when we sell completed houses on those lots.”

 

Balance Sheet Summary (Amount in Thousands)

   

September 30

2009

 

June 30

2009

 

December 31

2008

 

September 30

2008

Total Assets   $ 1,219,356   $ 1,289,818   $ 1,325,541   $ 1,324,334 Total Loans, excluding mortgage loans held for sale   $ 820,526   $ 927,982   $ 1,064,080   $ 1,193,242 Total Cash and Federal Funds   $ 274,706   $ 206,515   $ 111,632   $ 46,406 Non-Performing Assets   $ 586,559   $ 611,112   $ 601,192   $ 199,186        

Three Months Summary (In thousands, except ratios)

    Sept. 30, 2009   Sept. 30, 2008 Net Income (Loss)   $ (35,563)   $ (10,963) Net Interest Margin     -.03%     4.88% Non-cash loan loss provisions   $ 25,423   $ 28,000 Non-cash valuation adjustments to foreclosed real estate   $ 669   $ -0- Average Equity to Average Assets     8.17%     17.17%    

Net loss for the quarter ended September 30, 2009, was $35.56 million, or $2.26 per diluted share. The primary cause for the net loss was a non-cash provision for loan losses of $25.42 million for the three months ended September 30, 2009, compared to $28.00 million for the same quarter of 2008. Also contributing to the net loss is the $16.73 million reduction in interest income due to the level of nonperforming loans. The nonperforming assets expense for the quarter ended September 30, 2009, was $4.08 million, of which $669 thousand was attributable to non-cash valuation adjustment for foreclosed real estate, compared to $1.15 million for the same quarter in the prior year of 2008. On a diluted per share basis, net loss was $2.26 per share, compared to net loss of $.69 in the comparable period in 2008. Net interest loss after provision for credit losses was a loss of $25.51 million for the three months ended September 30, 2009, compared to net interest loss of $12.83 million for the same period in 2008.

 

Nine Months Summary (In thousands, except ratios)

    Sept. 30, 2009   Sept. 30, 2008 Net Income (Loss)   $ (66,343)   $ 4,041

Net Interest Margin

 

.45%

 

5.41%

Non-cash loan loss provisions   $ 42,299   $ 33,100 Non-cash valuation adjustments to other real estate owned   $ 7,985   $ 392 Average Equity to Average Assets   9.53%   17.16%    

Net loss for the nine months ended September 30, 2009, was $66.34 million, or $4.21 per diluted share. The primary cause for the net loss was a non-cash provision for loan losses of $42.30 million for the nine months ended September 30, 2009, compared to $33.10 million for the same period of 2008. Also contributing to the net loss is the $50.09 million reduction in interest income due to the level of nonperforming loans. The nonperforming assets expense for the nine months ended September 30, 2009, was $18.21 million, of which $7.99 million was attributable to non-cash valuation adjustment for foreclosed real estate, compared to $2.02 million for the same period in the prior year of 2008. On a diluted per share basis, net loss was $4.21 per share, compared to net income of $.26 in the comparable period in 2008. Net interest loss after provision for credit losses was a loss of $38.18 million for the nine months ended September 30, 2009, compared to net interest income of $17.59 million for the same period in 2008.

During the period from July 1, 2008, to date, the Bank experienced an 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 second half of 2008 and continuing through the first nine 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 an increase in nonperforming loans and a higher provision for loan losses of $42.30 million for the nine months ended September 30, 2009, compared to $33.10 million for the same period in the prior year. As of September 30, 2009, nonperforming assets totaled $586.56 million, which represents 48.10% of total assets. The total nonperforming assets balance reflects partial charge-offs to adjust loan balances to collateral value. As of September 30, 2009, the allowance for loan losses was $61.74 million, which represents 7.53% of total loans, compared to 3.21% in the third quarter of 2008.

Home Sales Including Pending Sales in Excess of $320 Million Year-to-Date

Mr. Heimbigner said, “City Bank and our borrowers have sold houses and some lots in excess of $320 million in construction loan balances during 2009. We are expecting that by the end of the year this will be approximately $370 million including pending sales.”

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 through October 16, 2009, 960 homes representing $287.44 million have been sold and paid-off and 118 properties have pending sales (signed agreements with earnest money deposits) totaling $33.41 million for closing dates primarily in October and November. The combination of paid and pending sales totaled 1,078 homes/lots representing $320.85 million in original construction loan balances. The average realized loss on these 1,078 transactions is 9.85% of the original loan principal. The average realized losses on the transactions that were short sales are 15.68% 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. Mr. Heimbigner commented, “These lower losses and some recoveries results are illustrative of the benefits that can be obtained from the sale of completed houses rather than residential building lots.”

          Q1 Actual Q2 Actual Q3 Actual Oct. MTD Pending TOTAL   Houses Sold 287 373 274 26 118 1,078 Average Construction Loan Balance $ 279,888 $ 311,441 $ 306,724 $ 265,293 $ 283,197 $ 297,637

Original Construction Loan Balance

All Sales ($ in Millions)

$ 80.33 $ 116.17 $ 84.04 $ 6.90 $ 33.41 $ 320.85

Original Construction Loan Balance

Short Sales ($ in Millions)

$ 201.54

Total Loss of Loan Principal

($ in Million)

$ 28.92 Average Realized Loss on All Sales 9.85%

Average Realized Loss on Short Sales

15.68%  

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:

          September 30, 2009   December 31, 2008   September 30, 2008               Shareholders’ Equity ($000’s)   $ 74,755   $ 141,157   $ 206,893

Allowance for Credit Losses ($000’s)

  $ 61,745   $ 34,990   $ 38,274 Combined Total   $ 136,500   $ 176,147   $ 245,167 Combined Total to Total Assets Ratio     11.19%     13.29%     18.51%  

The table above indicates that the Bank’s Shareholders’ Equity has been reduced by the impact of the net loss in the first nine months of 2009 and an unprecedented loan loss provision of $119.05 million in 2008 and $42.3 million in 2009. At the same time, the Bank built up the allowance for credit losses to $61.74 million from $38.27 million as of the same period in 2008. The combined total of Shareholders’ Equity and the Allowance for Credit Losses for the nine months of 2009, December 31, 2008, and September 30, 2008, are $136.50 million, $176.15 million and $245.17 million, respectively. During the nine months ended September 30, 2009, the Bank recorded net loan charge-offs of $15.54 million, compared to $6.10 million for the same period in 2008.

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

           

 

Leverage Capital

 

Tier 1 (Core) Capital

 

Tier 2 (Total) Capital

    Amount

Ratio

Amount Ratio Amount

Ratio

  Actual at Sept. 30, 2009 $ 74,665 6.19% $ 74,665 7.64% $ 87,489 8.95% 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% $156,424 12.88% Actual at September 30, 2008 $206,826 16.00% $206,826 16.28% $222,983 17.55%  

Liquidity and Cash Flow

At September 30, 2009, the Bank had a high level of liquidity (in the form of Cash, Cash in Banks, Interest Bearing Accounts in Banks and Federal Funds Sold) totaling $274.71 million, compared to $46.41 million at September 30, 2008. The following table summarizes the Bank’s liquid assets, which are approximately $326.41 million that can be realized in 90 days or less:

  Liquid Assets: Amount (in millions)   Cash and federal funds sold $ 274.71 Mortgage loans held for sale $ 9.60 Available for sale securities $ 14.10 Pending home sales (estimated net cash proceeds) $ 28.00 Total $ 326.41  

The following table is a summary of the Bank’s cash flow during the three and nine months ended September 30, 2009:

        ($ in Thousands) Q1 Actual   Q2 Actual   Q3 Actual  

Nine Months

Actual

Cash provided by (used in) operations $ (13,873) $ (2,993) $ 25,898 $ 9,032 Cash provided by investing activities $ 34,627 $ 82,274 $ 77,730 $ 194,631 (1) Cash provided by (used in) financing activities $ 52,730 $ (57,882) $ (35,437) $ (40,589)               Net increase in cash and fed funds sold $ 73,484   $ 21,399   $ 68,191   $ 163,074   Cash and fed funds sold at beginning of period $ 111,632 $ 185,116 $ 206,515 $ 111,632               Cash and fed funds sold at end of period $ 185,116   $ 206,515   $ 274,706   $ 274,706   1-Excludes investment of cash into Federal Funds Sold and Interest Bearing Deposits in Banks.  

Summary for the three and nine months ended September 30, 2009:

• Net cash provided by operating activities was $25.90 million and $9.03 million, respectively. This includes the impact of tax refunds totaling $18.89 million and $30.06 million for the three and nine months ended September 30, 2009.
• Net cash provided by investing activities was $77.73 million and $194.63 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 ($35.44 million) and ($40.59 million), respectively. This includes the repayment of brokered deposits of $271.70 million and $20.00 million of FHLB advance totaling $291.70 million during the nine-month period.

Result of Operations

Interest income for the three and nine months ended September 30, 2009, was down $16.73 million, or 66.29%, and $50.45 million, or 60.89%, from the comparable periods in 2008. As a result of the weakening residential real estate market, the Bank’s non-performing assets increased from $199.19 million at September 30, 2008, to $601.19 million at December 31, 2008, and decreased to $586.56 million at September 30, 2009. Accrued interest of $3.58 million was reversed from income for the nine months ended September 30, 2009, due to the transfer of loans to non-accrual status. The primary reason for the decrease in interest income was a result of the level of nonperforming loans. 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 nine months ended September 30, 2009, were 3.70% and 4.22%, down from 8.34% and 9.01% for the same periods in 2008. Net interest margin for the three and nine months ended September 30, 2009, decreased to -.03% and .45%, compared to 4.88% and 5.41% in the same periods in the prior year.

Interest expense for the three and nine months ended September 30, 2009, decreased to $8.59 million and $28.05 million, compared to $10.07 million and $31.57 million recorded in the comparable periods in 2008. The average cost of deposits and borrowed funds for the three and nine months ended September 30, 2009, decreased to 3.16% and 3.30%, compared to 3.89% and 4.14% for the same periods in 2008, reflecting a lower interest rate environment. Average interest-bearing deposits and borrowed funds for the nine months ended September 30, 2009, were $1.13 billion, an 11.50% increase over the $1.02 billion average for the comparable period in 2008.

Non-interest income for the three and nine months ended September 30, 2009, reflects a net decrease of $444 thousand and $1.60 million compared to the same periods in 2008. The majority of the decline 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 decrease of $386 thousand. Accounting for the net reduction in noninterest income of $386 thousand is the decrease in the net gain on sales of loans of $1.30 million and an increase in the net gains from sale of foreclosed real estate for $979 thousand.

Non-interest expense for the three and nine months ended September 30, 2009, were $11.09 million and $36.09 million, compared to $5.15 million and $15.22 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 $16.19 million for the nine months ended September 30, 2009, compared to the same period in 2008. For the nine months ended September 30, 2009, audit expense increased by $744 thousand due to increased review of nonperforming assets. FDIC insurance expense increased by $3.80 million for the nine months ended September 30, 2009, compared to the same period in 2008, which is a function of the Bank’s increased level of deposits, higher non-performing assets 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 $1.11 million for the nine months ended September 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 nine months ended September 30, 2009, was .93% and 7.83%, due to a deferred tax valuation allowance of $21.74 million established in 2009. At September 30, 2009, the Bank reported a federal income tax receivable of $13.94 million and a net deferred tax asset of $8.47 million.

At September 30, 2009, total assets were $1.20 billion, a decrease of 7.93% over September 30, 2008, primarily due to the sales of nonperforming assets of $287 million. Offsetting the decrease is an increase in the on balance sheet liquidity of $274.71 million due to the bank strong liquidity position. Total loans decreased by 30.79% to $830.13 million at September 30, 2009, compared to $1.20 billion at September 30, 2008. At September 30, 2009, deposits increased 5.99% to $1.07 billion, compared to $1.01 billion at September 30, 2008.

The ratios of average equity to average assets (Tier 1 Capital) for the three and nine months ended September 30, 2009, were 8.17% and 9.53%, compared to 17.17% and 17.16% 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 nine months ended September 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.

 

City Bank

Selected Financial Highlights (unaudited) (In thousands, except per share data)     Three months ended September   Nine months ended September Income Statement Data   2009     2008   % Change     2009     2008   % Change Interest income $ 8,508   $ 25,236   -66.29% $ 32,171   $ 82,260   -60.89% Interest expense 8,592 10,069 -14.67% 28,047 31,574 -11.17% Net interest income (84) 15,167 -100.55% 4,124 50,686 -91.86% Provision for credit losses 25,423 28,000 -9.20% 42,299 33,100 27.79% Net interest income (loss) after provision for credit losses (25,507) (12,833) 98.76% (38,175) 17,586 -317.08% Other noninterest income 701 1,145 -38.78% 2,287 3,891 -41.22% Cash expense related to nonperforming assets 3,414 1,150 196.87% 10,226 1,625 529.29% Valuation adjustment related to foreclosed real estate 669 - 100.00% 7,985 392 1936.99% Other noninterest expense 7,008 3,997 75.33% 17,882 13,205 35.42% Income (Loss) before income taxes (35,897) (16,835) 113.23% (71,981) 6,255 -1250.78% Provision (benefit) for income taxes (334) (5,872) -94.31% (5,638) 2,214 -354.65% Net Income (Loss) $ (35,563) $ (10,963) 224.39% $ (66,343) $ 4,041 -1741.75%   Share Data Actual shares outstanding 15,764 15,764 0.00% Earnings (loss) Per Share: Basic earnings per common share ($2.26) ($0.69) 227.54% ($4.21) $ 0.26 -1719.23% Diluted earnings per common share ($2.26) ($0.69) 227.54% ($4.21) $ 0.26 -1719.23% Book value per common share $ 4.74 $ 13.09 -63.77% Basic average shares outstanding 15,764 15,764 0.00% 15,764 15,760 0.03% Fully diluted average shares outstanding 15,764 15,764 0.00% 15,764 15,774 -0.06% Dividends paid per share $ 0.00 $ 0.15 -100.00% $ 0.00 $ 0.45 -100.00%   Balance Sheet Data (at period end)   Fed Funds Sold and Cash and Due From Bank $ 274,706 $ 46,406 491.96% Investment securities 14,355 14,333 0.15% Loans held for sale 9,605 6,113 57.12% Total on balance sheet liquidity $ 298,666 $ 66,852 346.76% Loans, net of unearned income 820,526 1,193,242 -31.24% Allowance for credit losses 61,745 38,274 61.32% Total assets 1,219,356 1,324,334 -7.93% Total deposits 1,068,921 1,008,508 5.99% Total Shareholders' Equity 74,755 206,893 -63.87%   Three months ended September Nine months ended September Cash Flow Statement Data   2009     2008   % Change     2009     2008   % Change Net cash provided by (used in) operating activities 25,898 9,991 159.21% 9,032 20,367 -55.65% Net cash provided by (used in) investing activities 77,730 (52,273) 248.70% 194,631 (109,403) 277.90% Net cash provided by (used in) financing activities   (35,437)     40,986 -186.46%   (40,589)     83,858 -148.40% Net increase (decrease) in cash and federal funds sold 68,191 (1,296) 5361.65% 163,074 (5,178) 3249.36%   Cash and federal funds sold at beginning of period   206,515     47,702 332.93%   111,632     51,584 116.41% Cash and federal funds sold at end of period   274,706     46,406 491.96%   274,706     46,406 491.96%   Selected Ratios Return on average shareholders' equity -140.26% -19.71% -611.62% -71.70% 2.46% -3016.73% Average shareholders' equity to average assets 8.17% 17.17% -52.43% 9.53% 17.16% -44.43% Return on average total assets -11.46% -3.38% -238.54% -10.25% 0.63% -1720.77% Net interest spread -0.25% 4.23% -105.91% 0.23% 4.63% -95.03% Net interest margin -0.03% 4.88% -100.61% 0.45% 5.41% -91.68% Efficiency ratio 1790.86% 31.55% -5576.37% 562.38% 27.89% -1916.52% Effective tax expense (benefit) rate -0.93% -34.88% -97.33% -7.83% 35.40% -122.13% Asset Quality Ratios Allowance for credit losses $ 61,745 $ 38,274 61.32% Allowance to ending total loans 7.53% 3.21% 134.60% Non-performing assets: Non-accrual $ 394,471 $ 109,303 260.90% 90 days past due and still accruing $ 1,401 $ 1,510 -7.22% Impaired loans still accruing $ 64,473 $ 19,660 227.94% Foreclosed real estate $ 126,214 $ 68,713 83.68% Total Non-performing assets $ 586,559 $ 199,186 194.48% Non-performing assets to total assets 48.10% 15.04% 219.83% Net (charge-offs) recoveries $ (15,544) $ (6,095) 155.03% Net loan charge-offs (annualized) to average loans 2.09% 0.68% 208.29%