CTBK City Bank (MM)

City Bank (NASDAQ:CTBK) today announced a net loss of $38.26 million for the quarter ended December 31, 2009, or $2.43 per diluted share, compared to a reported net loss of $64.88 million, or $4.12 per diluted share for the same quarter in the prior year. The Bank also announced a net loss of $104.61 million or $6.64 per share for the twelve months ended December 31, 2009 compared to a net loss of $60.84 million or $3.86 per share for the same period in 2008.

Martin Heimbigner, President and CEO, commented, “The Bank’s losses for the quarter and the twelve months were significantly impacted by declining values in the market for the bulk sale of residential building lots. Due to the distressed pricing, it is not City Bank’s strategy to sell bulk lots. City Bank has implemented a strategy to develop the lots and sell the properties with completed houses at that time. However, in accordance with accounting requirements, we are required to carry residential building lots at distressed market prices until we sell the completed houses. Real estate investors are buying land at these prices because they appear to believe the profit opportunities in the next few years are substantial. As reflected later in this press release, once we have been able to complete finished houses on building lots our realization on the original loan amount has been approximately 90 percent.”

The primary causes for the net loss for the three months ended December 31, 2009 were a non-cash provision for loan losses of $46.50 million, a non-cash valuation adjustment for foreclosed real estate of $21.99 million, and a reduction in interest income of $5.83 million. The non-cash charges, totaling $68.49 million, represent the Bank’s estimate of changes in the appraised value of loan collateral and foreclosed real estate due to the ongoing disruption in residential land markets. For the twelve months ended December 31, 2009 net loss was $38.26 million, which was impacted by a non-cash provision for loan losses of $88.80 million for the twelve months ended December 31, 2009 compared to $119.05 million for the same period of 2008. Also contributing to the net loss is the $58.12 million reduction in interest income due to the level of non-performing loans. The non-performing assets expense for the twelve months ended December 31, 2009 was $44.88 million, of which $29.97 million was attributable to non-cash valuation adjustment for foreclosed real estate, compared to $16.27 million for the same period in the prior year of 2008.

Mr. Heimbigner added, “The non-cash losses recorded in the fourth quarter reduced the net book value of the Bank’s non-performing assets to approximately 63 percent of the original loan amount. Due to the distressed values we have recorded for our building lots, we expect 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 (Amounts in Thousands)

  December 31,   September 30,   December 31,       2009     2009     2008 Total Assets   $ 1,129,154   $ 1,219,356   $ 1,325,541 Total Loans, Excluding Mortgage Loans Held For Sale   $ 590,419   $ 820,526   $ 1,064,080 Total Cash and Cash Equivalents   $ 277,182   $ 274,706   $ 111,632 Non-Performing Assets, Net of Charge-offs and Valuation Adjustments   $ 425,378   $ 586,559   $ 601,192  

Three Months Summary (In thousands, except ratios)

  December 31,   December 31,     2009   2008 Net Income (Loss)   $ (38,264)   $ (64,884) Net Interest Margin     .02%     1.87% Non-Cash Loan Loss Provisions   $ 46,500   $ 85,951 Non-Cash Valuation Adjustments to Other Real Estate Owned   $ 21,987   $ 15,883 Average Equity to Average Assets     5.67%     15.63%  

The net loss for the quarter ended December 31, 2009 was $38.26 million, or $2.43 per diluted share compared to a net loss of $64.88 million or $4.12 in the comparable period in 2008. The primary cause for the net loss was:

• A non-cash provision for loan losses of $46.50 million for the three months ended December 31, 2009 compared to $85.95 million for the same quarter of 2008.
• The non-performing assets expense for the quarter ended December 31, 2009 was $26.66 million, of which $21.99 million was attributable to non-cash valuation adjustment for foreclosed real estate, compared to $15.88 million for the same quarter in the prior year of 2008.
• Also contributing to the net loss is the $5.83 million reduction in interest income due to the level of non-performing loans.

Net interest loss after provision for credit losses was a loss of $46.45 million for the three months ended December 31, 2009 compared to net interest loss of $80.07 million for the same period in 2008.

Twelve Months Summary (In thousands, except ratios)

  December 31,   December 31,       2009     2008 Net Income (Loss)   $ (104,607)   $ (60,843) Net Interest Margin     .35%     4.52% Non-Cash Loan Loss Provisions   $ 88,799   $ 119,051 Non-Cash Valuation Adjustments to Other Real Estate Owned   $ 29,972   $ 16,275 Average Equity to Average Assets     8.60%     16.76%  

The net loss for the twelve months ended December 31, 2009 was $104.61 million, or $6.64 per diluted share compared to a net loss of $60.84 million or $3.86 per diluted share in the comparable period in 2008. The primary cause for the net loss was:

• A non-cash provision for loan losses of $88.80 million for the twelve months ended December 31, 2009 compared to $119.05 million for the same period of 2008.
• Also contributing to the net loss is the $58.12 million reduction in interest income due to the level of non-performing loans.
• The non-performing assets expense for the twelve months ended December 31, 2009 was $44.88 million, of which $29.97 million was attributable to non-cash valuation adjustment for foreclosed real estate, compared to $16.27 million for the same period in the prior year of 2008.

Net interest loss after provision for credit losses was a loss of $84.62 million for the twelve months ended December 31, 2009 compared to net interest loss of $62.48 million for the same period in 2008.

Capital Ratios

As noted above the quarterly and annual losses have reduced the Bank’s capital due to the depressed values for residential building lots. The following table represents the Bank’s Regulatory Capital and Ratios as of the indicated dates:

(Amounts in Thousands)

          Leverage Capital Tier 1 (Core) Capital Tier 2 (Total) Capital   Amount  

Ratio

Amount   Ratio Amount  

Ratio

  Actual at December 31, 2009 $ 36,403 3.04 % $ 36,403 4.13 % $ 47,435 5.38 % Actual at September 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 %  

The Bank has engaged an investment banking firm and is continuing its efforts to raise additional capital during the first quarter of 2010.

Mr. Heimbigner commented, “We believe that the worst part of the recession is past and that our management team and dedicated employees have demonstrated that our strategy of selling finished homes is working to reduce our non-performing assets. We have written down the carrying value of our real estate assets to a level that real estate investors would like to buy our assets directly. As such, we believe that we have an opportunity to raise capital based on the quality of the Bank’s real estate assets and our approach to generating higher economic value than bulk sales of assets.”

Home Sales Including Pending Sales in Excess of $360 Million for the Year Ended December 31, 2009

Mr. Heimbigner said, “In the past year, City Bank and our borrowers have been leaders in selling residential real estate in the Puget Sound region. We have sold 1,235 houses and lots totaling more than $360 million in construction loans for the year ended December 31, 2009.”

The average realized loss on these 1,235 transactions is 9.94% of the original loan principal. The average realized losses on the transactions that were short sales are 16.22% of the original loan principal. Mr. Heimbigner commented, “These lower losses combined with some recoveries are illustrative of the substantial benefits that can be obtained from selling completed houses rather than bulk selling residential building lots in this distressed market.”

  Q1 Actual   Q2 Actual   Q3 Actual   Q4 Actual   Pending   TOTAL   Houses Sold 287 373 274 246 55 1,235 Average Construction Loan Balance $ 279,888 $ 311,441 $ 306,724 $ 253,982 $ 310,723 $ 291,585 Original Construction Loan Balance All Sales ($ in Millions) $ 80.33 $ 116.17 $ 84.04 $ 62.48 $ 17.09 $ 360.11 Original Construction Loan Balance Short Sales ($ in Millions) $ 220.84 Total Loss of Loan Principal ($ in Millions) $ 32.73 Average Realized Loss on All Sales 9.94%   Average Realized Loss on Short Sales 16.22%  

Liquidity and Cash Flow

At December 31, 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 $277.18 million compared to $111.63 million at December 31, 2008. The following table summarizes the Bank’s liquid assets, which are approximately $372.43 million that can be realized in 90 days or less:

Liquid Assets:   Amount (In Millions)   Cash and Cash Equivalents $ 277.18 Mortgage Loans Held For Sale $ 5.89 Available For Sale Securities $ 12.85 Federal Income Tax Receivable $ 59.42 Pending Home Sales (estimated net cash proceeds) $ 17.09 Total $ 372.43  

The following table is a summary of the Bank’s Quarterly Cash Flow for the year ended December 31, 2009:

 

          Twelve Months

($ in Thousands)

Q1 Actual   Q2 Actual   Q3 Actual   Q4 Actual   Actual Cash provided by (used in) operations $ (13,873 ) $ (2,993 ) $ 25,898 $ (7,553 ) $ 1,479   Cash provided by investing activities $ 34,627 $ 82,274 $ 77,730 $ 58,330 $ 252,961   Cash provided by (used in) financing activities $ 52,730 $ (57,882 ) $ (35,437 ) $ (48,301 ) $ (88,890 )                   Net increase in cash and fed funds sold $ 73,484     $ 21,399     $ 68,191     $ 2,476     $ 165,550     Cash and fed funds sold at beginning of period $ 111,632 $ 185,116 $ 206,515 $ 274,706 $ 111,632                   Cash and fed funds sold at end of period $ 185,116     $ 206,515     $ 274,706     $ 277,182     $ 277,182    

Summary for the three and twelve months ended December 31, 2009:

• Net cash provided by (used in) operating activities was ($7.55) million and $1.48 million, respectively. This includes the impact of tax refunds totaling $30.06 million for the year ended December 31, 2009.
• Net cash provided by investing activities was $58.33 million and $252.96 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 ($48.30) million and ($88.89) million, respectively. This includes the repayment of brokered deposits of $372.43 million, $67.14 million of public deposits and $20.00 million of FHLB advance totaling $459.57 million during the twelve month period.

Result of Operations

Interest income for the three and twelve months ended December 31, 2009 decreased $8.03 million or 49.92% and $58.12 million or 59.10% 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 $425.38 million at December 31, 2009. Accrued interest of $3.92 million was reversed from income for the twelve months ended December 31, 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 non-performing 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 twelve months ended December 31, 2009 were 4.10% and 4.20%, down from 5.31% and 8.09% for the same periods in 2008. Net interest margin for the three and twelve months ended December 31, 2009 decreased to .02% and .35% compared to 1.87% and 4.52% in the same periods in the prior year.

Interest expense for the three and twelve months ended December 31, 2009 decreased to $8.01 million and $36.05 million compared to $10.21 million and $41.78 million, respectively, recorded in the comparable periods in 2008. The average cost of deposits and borrowed funds for the three and twelve months ended December 31, 2009 decreased to 2.95% and 3.21% compared to 3.75% and 4.04% for the same periods in 2008, reflecting a lower interest rate environment in addition to the substantial pay down of brokered deposits. Average interest bearing deposits and borrowed funds for the twelve months ended December 31, 2009 were $1.12 billion, an 8.40% increase over the $1.03 billion average for the comparable period in 2008.

Non-interest income for the three and twelve months ended December 31, 2009 reflects a net decrease of $206 thousand and $1.81 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. The Bank continues to hold 45,000 shares of VISA Class B stock that are carried on the books at zero, but are estimated to have a fair market value in excess of $3.50 million. Non-interest income excluding VISA, Inc. reflected a net decrease of $592 thousand. Accounting for the net reduction in non-interest income of $592 thousand is the decrease in the net gain on sales of loans of $1.62 million and an increase in the net gains from sale of foreclosed real estate for $734 thousand.

Non-interest expense for the three and twelve months ended December 31, 2009 was $29.35 million and $65.45 million compared to $20.47 million and $35.69 million for the same periods in 2008. The majority of the increase relates to losses and expenses on non-performing loans and foreclosed real estate, which increased by $25.17 million for the twelve months ended December 31, 2009 compared to the same period in 2008. For the twelve months ended December 31, 2009, audit expense increased by $1.38 million due to the increased review of non-performing assets. FDIC insurance expense increased by $4.17 million for the twelve months ended December 31, 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 $1.69 million for the twelve months ended December 31, 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 twelve months ended December 31, 2009 was 49.17% and 28.96%, due to a deferred tax valuation allowance of $9.21 million established in 2009. During the fourth quarter of 2009, the Federal income tax law was changed to extend the net operating loss (NOL) carryback period from two years to five years for losses incurred in 2008 or 2009. This resulted in the 49.17% effective tax benefit rate for the fourth quarter. At December 31, 2009 the Bank reported a federal income tax receivable of $59.42 million, which is expected to be received the first quarter of 2010.

At December 31, 2009, total assets were $1.29 billion, a decrease of 14.82% over December 31, 2008 primarily due to the sales of non-performing assets of $343 million. Offsetting the decrease is an increase in the on balance sheet liquidity of $277.18 million due to the Bank’s strong liquidity position. Total loans decreased by 44.51% to $590.42 million at December 31, 2009 compared to $1.06 billion at December 31, 2008. At December 31, 2009, deposits decreased 6.21% to $1.02 billion compared to $1.09 billion at December 31, 2008 primarily due to brokered deposits pay down of $372.00 million.

The ratios of average equity to average assets (Tier 1 Capital) for the three and twelve months ended December 31, 2009 were 5.67% and 8.60% compared to 15.63% and 16.76% 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 twelve months ended December 31, 2009 and 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 December

Twelve months ended December

Income Statement Data

  2009       2008     % Change       2009       2008     % Change   Interest income $ 8,059 $ 16,093 -49.92 % $ 40,230 $ 98,353 -59.10 % Interest expense 8,005 10,207 -21.57 % 36,052 41,781 -13.71 % Net interest income 54 5,886 -99.08 % 4,178 56,572 -92.61 % Provision for credit losses 46,500 85,951 -45.90 % 88,799 119,051 -25.41 % Net interest income (loss) after provision for credit losses (46,446 ) (80,065 ) -41.99 % (84,621 ) (62,479 ) 35.44 % Other noninterest income 524 730 -28.22 % 2,811 4,621 -39.17 % Cash expense related to nonperforming assets 4,677 1,810 158.40 % 14,903 3,435 333.86 % Valuation Adjustment related to nonperforming assets 21,987 15,883 38.43 % 29,972 16,275 84.16 % Other noninterest expense 2,690 2,776 -3.10 % 20,572 15,981 28.73 % Income (Loss) before income taxes (75,276 ) (99,804 ) -24.58 % (147,257 ) (93,549 ) 57.41 % Provision (benefit) for income taxes (37,012 ) (34,920 ) 5.99 % (42,650 ) (32,706 ) 30.40 % Net Income (Loss) $ (38,264 ) $ (64,884 ) -41.03 % $ (104,607 ) $ (60,843 ) 71.93 %   Share Data Actual shares outstanding 15,764 15,764 0.00 % Earnings Per Share: Basic earnings per common share ($2.43 ) ($4.12 ) -41.02 % ($6.64 ) ($3.86 ) 72.02 % Diluted earnings per common share ($2.43 ) ($4.12 ) -41.02 % ($6.64 ) ($3.86 ) 72.02 % Book value per common share $ 2.31 $ 8.95 -74.14 % Basic average shares outstanding 15,764 15,764 0.00 % 15,764 15,761 0.02 % Fully diluted average shares outstanding 15,764 15,764 0.00 % 15,764 15,772 -0.05 % Dividends paid per share $ 0.00 $ 0.06 -100.00 % $ 0.00 $ 0.51 -100.00 %   Balance Sheet Data (at period end)   Fed Funds Sold and Cash and Due From Bank $ 277,182 $ 111,632 148.30 % Investment securities 12,849 14,483 -11.28 % Loans held for sale 5,887 7,190 -18.12 % Total on balance sheet liquidity $ 295,918 $ 133,305 121.99 % Loans, net of unearned income 590,419 1,064,080 -44.51 % Allowance for credit losses 11,481 34,990 -67.19 % Total assets 1,129,154 1,325,541 -14.82 % Total deposits 1,020,494 1,088,091 -6.21 % Total Shareholders' Equity 36,483 141,157 -74.15 %  

Three months ended December

Twelve months ended December Cash Flow Statement Data   2009       2008    

% Change

      2009       2008    

% Change

  Net cash provided by (used in) operating activities (7,553 ) 3,205 -335.66 % 1,479 23,572 -93.73 % Net cash provided by (used in) investing activities 58,330 (7,549 ) -872.69 % 252,961 (116,952 ) -316.29 % Net cash provided by (used in) financing activities

(48,301

)

69,570

-169.43 %

(88,890

)

153,428

-157.94 % Net increase (decrease) in cash and federal funds sold 2,476 65,226 -96.20 % 165,550 60,048 175.70 %   Cash and federal funds sold at beginning of period   274,706       46,406   491.96 %   111,632       51,584   116.41 % Cash and federal funds sold at end of period   277,182       111,632   148.30 %   277,182       111,632   148.30 %  

Three months ended December

Twelve months ended December

Income Statement Data

2009

 

2008

 

% Change

 

2009

 

2008

 

% Change

Selected Ratios

Return on average shareholders' equity -221.64 % -125.30 % 76.88 % -95.37 % -28.15 % 238.82 % Average shareholders' equity to average assets 5.67 % 15.63 % -63.73 % 8.60 % 16.76 % -48.68 % Return on average total assets -12.56 % -19.58 % -35.85 % -16.41 % -4.72 % 247.78 % Net interest spread -0.02 % 1.37 % -101.46 % 0.17 % 3.82 % -95.55 % Net interest margin 0.02 % 1.87 % -98.93 % 0.35 % 4.52 % -92.26 % Effective tax expense (benefit) rate -49.17 % -34.99 % 40.53 % -28.96 % 34.96 % -182.84 % Asset Quality Ratios Allowance for credit losses $ 11,481 $ 34,990 -67.19 % Allowance to ending total loans 1.94 % 3.29 % -40.86 % Non-performing assets: Non-accrual $ 200,312 $ 416,189 -51.87 % 90 days past due and still accruing $ - $ 313 -100.00 % Impaired loans still accruing $ 44,465 $ 84,732 -47.52 % Foreclosed real estate $ 180,601 $ 99,958 80.68 % Total Non-performing assets $ 425,378 $ 601,192 -29.24 % Non-performing assets to total assets 37.67 % 45.35 % -16.94 % Net (charge-offs) recoveries $ (112,308 ) $ (95,331 ) 17.81 % Net loan charge-offs (annualized) to average loans 11.99 % 7.95 % 50.80 %