City Bank (NASDAQ:CTBK) today announced earnings of $15.00 million for the six months ended June 30, 2008, reflecting a decrease of 28.32% from $20.93 million for the same period in 2007. The Bank’s diluted net income per share reflects a decrease of 28.03% to $.95 from $1.32 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 extreme financial stress that may be the worst period in my 34 years of banking. City Bank, despite being impacted by these industry wide problems, is well positioned with one of the highest levels of capital for a bank our size. We are a bank that has focused on the residential real estate construction lending market for our entire history, and believe that we do a better job of underwriting loans and managing the risk during periods like this where certain of our borrowers are unable to perform under the terms of their loans.”
Net interest income after provision for credit losses was $30.42 million for the six months of 2008 compared to $40.65 million for the prior period in 2007, reflecting a decrease of 25.17%. 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. The Bank has experienced increases in nonperforming loans, charge-offs and loan loss provision. 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 $1.84 million had been reversed from income. During the first six months of 2008, the Bank recorded a provision for credit losses of $5.10 million as compared to $150 thousand for the same period in the prior year. The increase in the allowance for credit losses was in response to specific real estate construction loans that were placed on non-accrual status, as well as declines in the quality of the Bank’s overall portfolio. The Bank’s net charge-offs for the six months ended June 30, 2008 were $1.84 million compared to $157 thousand in the prior year. In spite of the difficult market conditions, the Bank maintains an outstanding efficiency ratio of 26.33%.
Conrad Hanson also commented on the banks credit quality, “Over the five year period from 2003 to 2007, City Bank has managed its loan portfolio with only $2.82 million of actual net charge-offs or a loss ratio of .08% while the industry incurred a loss ratio of .62%. We expect that our net charge-offs coming from the current problems will be significantly higher than we have experienced in the past, but will continue to be at levels that are below the industry averages. This is the City Bank difference that we have demonstrated for 34 years.”
Year-to-Date Highlights (In thousands, except ratios)
|June 30, 2008||March 31, 2008||June 30, 2007|
|Net Interest Margin||5.67%||6.09%||7.50%|
|Return on Average Assets (ROA)||2.37%||3.11%||3.81%|
|Return on Average Equity (ROE)||13.79%||18.09%||20.76%|
|Average Equity to Average Assets||17.15%||17.21%||18.34%|
|Total Shareholders’ Equity||$||220,256||$||217,393||$||209,258|
Net income for the three months ended June 30, 2008 was $5.32 million compared to $10.56 million in the prior year, reflecting a decrease of $5.24 million primarily due to a higher provision for loan losses of $4.60 million compared to $150 thousand for the same quarter of 2007. On a diluted per share basis, net income was down 49.25% to $.34 from $.67 in the comparable period in 2007. Net interest income after provision for credit losses was $12.16 million for the three months ended June 30, 2008 compared to $20.71 million for the same period in 2007, reflecting a decrease of 41.30%. During this housing downturn, the Bank is experiencing loan quality issues that are contributing to the declines in earnings for this quarter as evidenced by the increase in its non-performing loans. 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. Despite deterioration in the loan portfolio, which is not expected to improve in the near term, profitability is expected to continue albeit at a lower level than the last several years. In addition, 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)
|June 30, 2008||March 31, 2008||June 30, 2007|
|Net Interest Margin||5.25%||6.09%||7.49%|
|Return on Average Assets (ROA)||1.65%||3.11%||3.75%|
|Return on Average Equity (ROE)||9.63%||18.09%||20.50%|
|Average Equity to Average Assets||17.09%||17.21%||18.30%|
Result of Operations
Interest income for the first six months of 2008 was down 4.43% from the comparable period in 2007. As a result of the weakening residential real estate market, the Bank’s nonperforming assets increased from $2.02 million at June 30, 2007, to $33.77 million at December 31, 2007, $56.59 million at March 31, 2008 and $103.36 million at June 30, 2008. 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 six months ended June 30, 2008 was 9.34%, down 194 basis points from 11.28% for the prior period in 2007, and net interest margin decreased to 5.67% compared to 7.50% in the same period in the prior year. The slowdown in the housing market will prove to remain particularly challenging, and the Bank expects higher loan delinquencies, non-accruals and potential charge-offs to continue for the remainder of the 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.
Interest expense for the six months ended June 30, 2008 was up 14.00% from 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 six months ended June 30, 2008 decreased to 4.27%, down 16 basis points from 4.43% for the same period in 2007, reflecting a lower rate environment. Average time deposits and borrowed funds for the six months ended June 30, 2008 were $1.01 billion, an 18.27% increase from the $852.29 million average for the comparable period in 2007.
Non-interest income of $2.75 million reflects a net increase of $1.18 million or 75.80% for the six months ended June 30, 2008 over the six months ended June 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. In addition, the Bank also reversed $120 thousand of previously recorded indemnification liabilities related to VISA litigation during first quarter of 2008. Net gains from sale of loans increased $321 thousand compared to the same period of 2007. SBA loan servicing income decreased by $41 thousand 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 $10.08 million in the six months of 2008 reflects a net increase of 4.15% or $401 thousand compared to the same period of 2007. The majority of the increase relates FDIC insurance expense, which increased by $215 thousand as compared to the same period in 2007. The Bank also recorded a net loss on sale of foreclosed real estate of $189 thousand for the six months ended June 30, 2008. Foreclosed real estate expense increased by $156 thousand compared to the same period in 2007. Occupancy expense also increased by $109 thousand compared to the same period in 2007. Offsetting the increase was a decrease in state and local tax expense of $349 thousand.
At June 30, 2008, total assets were $1.29 billion, up 13.10% over June 30, 2007. Asset growth since December 31, 2007 was $52.94 million or 4.27%. Loans grew 11.32% to $1.18 billion at June 30, 2008 compared to $1.06 billion at June 30, 2007. Loan growth since December 31, 2007 was $18.53 million or 1.59%. At June 30, 2008, deposits increased 17.93% to $955.18 million compared to $809.98 million at June 30, 2007 and 10.49% since December 31, 2007.
City Bank’s return on average assets for the six months ended June 30, 2008 was 2.37% compared to 3.81% for the same period in 2007. Return on average equity was 13.79% for the six months ended June 30, 2008, compared to 20.76% for the same period in 2007. The ratio of average equity to average assets (Tier 1 Capital) for the six months ended June 30, 2008 was 17.15% compared to 18.34% 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 June 30, 2008. The Bank also declared a regular quarterly cash dividend of $.15 per share during second quarter of 2008.
The previous discussion contains a review of City Bank’s operating results and financial condition for the three and six months ended June 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 June||Six months ended June|
|Income Statement Data||2008||2007|
|Net interest income||16,758||20,863||-19.68%||35,519||40,801||-12.95%|
|Provision for credit losses||4,600||150||2966.67%||5,100||150||3300.00%|
Net interest income after provision for credit losses
|Other noninterest income||934||741||26.05%||2,746||1,562||75.80%|
|Other noninterest expense||5,128||5,048||1.58%||10,075||9,674||4.15%|
|Income before income taxes||7,964||16,406||-51.46%||23,090||32,539||-29.04%|
|Provision for income taxes||2,645||5,851||-54.79%||8,086||11,608||-30.34%|
|Actual shares outstanding||15,764||15,721||0.27%|
|Earnings Per Share:|
|Basic earnings per common share||$||0.34||$||0.67||-49.25%||$||0.95||$||1.33||-28.57%|
|Diluted earnings per common share||$||0.34||$||0.67||-49.25%||$||0.95||$||1.32||-28.03%|
|Book value per common share||$||13.97||$||13.31||4.97%|
|Basic average shares outstanding||15,764||15,715||0.31%||15,759||15,699||0.38%|
|Fully diluted average shares outstanding||15,770||15,864||-0.59%||15,780||15,855||-0.47%|
|Dividends paid per share||$||0.15||$||0.15||0.00%||$||0.30||$||0.30||0.00%|
|Balance Sheet Data (at period end)|
|Loans held for sale||6,373||4,296||48.35%|
|Loans, net of unearned income||1,173,911||1,059,129||10.84%|
|Allowance for credit losses||14,530||10,279||41.36%|
|Liabilities related to discontinued operations||833||1,333||-37.51%|
Total Shareholders' Equity
|Return on average shareholders' equity||9.63%||20.50%||-53.03%||13.79%||20.76%||-33.55%|
Average shareholders' equity to average assets
|Return on average total assets||1.65%||3.75%||-56.13%||2.37%||3.81%||-37.87%|
|Net interest spread||4.46%||6.52%||-31.60%||4.83%||6.55%||-26.26%|
|Net interest margin||5.25%||7.49%||-29.91%||5.67%||7.50%||-24.40%|
|Asset Quality Ratios|
|Allowance for credit losses||$||14,530||$||10,279||41.36%|
|Allowance to ending total loans||1.24%||0.97%||27.53%|
|90 days past due and still accruing||$||11||$||49||-77.55%|
|Foreclosed real estate||$||40,171||$||-||100.00%|
|Non-performing assets to total assets||8.00%||0.18%||4426.29%|
|Net (charge-offs) recoveries||$||(1,839)||$||(157)||1071.34%|
|Net loan charge-offs (annualized) to average loans||0.31%||0.03%||906.66%|