It's Not Citi, But City Bank Not Pretty Either

by: Tim Plaehn posted on: July 19, 2008 | about stocks: CTBK    

City Bank (CTBK) of Lynnwood, Wash. released its 2nd quarter earnings Friday, and they were not pretty. They took a large charge off and a significant portion of their loan portfolio is nonperforming. Here are a few of the pertinent figures compared to the 2nd quarter of 2007.

  • Net earnings of $5.3 million vs. $10.5 million; the difference can be accounted for mainly by the $4.4 million increase in loan loss reserves and $1.8 million in charge offs.
  • Net per share of 34¢ vs. 67¢.
  • Non-performing loans of $63 million vs. just under $2 million one year ago.
  • Foreclosed assets of $40 million vs. none a year ago.
  • Non-performing loans are 8.0% of assets vs. 0.18%.

City Bank’s main business is residential construction loans and it is obvious the company has a lot (8%!!) of assets in that area that are in trouble. The slowdown in residential housing construction definitely hits this bank where it hurts the most.

On the positive side, the City Bank predicts it will remain profitable, though reduced from previous years. The 15¢ per quarter dividend should be safe. Loan loss reserves now total about $15 million, which appears adequate and their Tier 1 capital ratio of 17% is well above the 4% minimum.

At this point the question for me is, how long will it take the bank to work out its problem loans? If earnings are another 60¢ per share for the remaining half of the year, the PE and yield are still around 6 at a $10 share price. Not bad valuations if this is the worst; however at this time I think it will take several quarters to work out the problems. I believe that City Bank has excellent management, but current economic conditions are working against a speedy recovery.

On Monday I plan to reduce my holdings in CTBK by about 2/3.

This article has 6 comments! Add yours below...
Tim Plaehn

Tim Plaehn

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This article has 6 comments:

  •  
    sambordulac
    Jul 20 09:32 AM
    Thank you for the update, Mr. Plaehn.

    On the last item of your highlight, my understanding is that the percentage took in both the non-performing assets as well as assets foreclosed (asset owned)--roughly $100 million vs $1,250 million in asset, or 8%.

    True, by your projected earnings, the shares are cheap. With business in distress, the central theme may have shifted to whether non-performing loan would continue to eat into capital. CTBK is trading at roughly 75% of its book value. There is no justification unless we can envision that the business would be seriously impaired or that it'll lose some money during this down turn. On the later, I am not all that confident. The NPL+asset owned was less than 1.0% at year end, 4.5% at March quarter and now at 8%. The trajectory suggests that more are to come. Recovery rate can be as low as 60% on uncompleted projects or land. I feel the reserve (1.5%) may not be adequate to cover the 8% reported dead money.

    So, I think the market may be right in assigning a value below book. However, I don't see the company go under unless the Puget Sound area RE market experience long and deep decline. 17% in tier-1 capital probably would make it the last bank standing.

    I am interested in purchasing additional shares. I'd be interested to hear what you think.

    Regards, Sam
  •  
    biomedlives
    Jul 20 11:05 AM
    I agree with sambordulac that the trend in non-performing assets does not inspire confidence, and I'm surprised that the current level is at 8% for a bank operating in a geographic area that does not appear to have had a real estate bubble.
  •  
    190274
    Jul 20 02:26 PM
    you pushed this stock when it was 20. On 6/18 you pushed it again. ishould have realized then that you didn`t know what you were talking about. who told you that you knew enough to be a financial writer?
  •  
    Tim Plaehn
    Jul 20 03:50 PM
    My Website
    Sam, at this time I am going to the sidelines on CTBK and waiting for a couple of quarterly reports. I will continue to hold a small position, but think they are a couple of quarters away from starting to recover.

    #190274, you got me. My method is to find stock of little following and news and get in at a good value. CTBK has a 33 year track record of excellent management and I thought they would do better this time. Check Google or Yahoo and tell us how many news articles you can find on this stock. I personally put my money in this stock and will take a loss. Want to share your record here?
  •  
    zapi2003
    Jul 22 06:26 PM
    This share is pretty cheap. I bought 1000 shares @ 8.47 ! incredible. I am very glad.
  •  
    User 127559
    Jul 24 03:43 PM
    Thank you, Tim. I wish everyone was so willing to be upfront. Who among us during the last year or so has been able to consistently make the calls. A year ago, no one would have ever called Wachovia going to a low of around $7.

    I have to think CTBK has seen its lows, and just like BAC, BBT, WB, etc., CTBK will rise from here, although sporadically.
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