The Long Case for City Bank

My favorite City Bank (CTBK) is the regional bank located in Washington state. It released results for the 1st quarter of 2008 on Monday and results were mixed. The major financial media laser-focused on the fact that net earnings fell about 6%, but I hope to give a little more in-depth analysis here. First an outline of some of the results compared to Q1, 2007.

• Net income: $9.69 million, -6.7%
• Net interest income: $18.26 million, -8.4%
• Total loan: $1.213 billion, +16.7%
• Non-performing assets: $56.6 million, 4.6% of total loans, up from $2.7 million
• Net interest margin: 6.09% down from 7.52%

The press release from City Bank noted the financial slow down is having an effect on the bank in the form of a higher amount of non-performing assets and tighter net interest margin. It also noted that assets continued to grow in the 1st quarter, up 5.65% from 12/31/2007.

I believe small, well run regional banks can be tremendous cash and profit generators. City Bank management has proven itself to do a fine job in the past and I think it will weather this current economic slowdown in fine shape. The company is continuing to grow assets during these tough times and profits will follow as the economy improves. The 3% dividend is covered 4x by projected earnings. Here are a couple of banking related ratios that show how City Bank stacks up against the average of comparable banks. Source

• Return on Average Assets [ROA]: 3.11% vs. 1.06% (higher is better)
• Return on Average Equity [ROE]: 18.09% vs. 10.8%
• Efficiency Ratio: 22% vs. 59% (lower is better, below 50% considered excellent)

At this point the stock trades at 7.5 times 2007 and projected 2008 earnings. Over the last few years the company has paid at least a $1.00 special dividend at the end of the year, pushing the possible yield to 8%. With the start of an economic recovery this could be a $30 stock again. I am not expecting higher stock values soon for CTBK.

Note: I currently have a long position in CTBK.

Comments

[biomedlives]

I agree that the superior ROA, ROE, and efficiency are appealing, but $11 million is definitely not an "adequate loan loss reserve" (CTBK story on Business Wire, 4/14) for $56 million in non-performing assets. CTBK should be adding more to the reserve.

[ChandlerLutz]

Good Article! I am curious as to what their overall capital ratios are as well compared to historical norms. This may provide more insight as to why their loan loss reserves are quite low as biomedlives pointed out

[sambordulac]

Very good summary, Tim.

You have provided an excellent snap shot of the bank.
Just wonder how the bank were able to charge more for the loans and maintained double-the-industry interest rate spread, and for so long. One possibility is the concentration in project loans. maybe? If so, the risk maybe much higher during this down turn.

The bank maintained exceptional financial leverage. Even with higher risk per loan value, I'd guess that the equity would not erode nearly as much as average banks. For its existence to be threatened, most banks would be wiped out already, a scenario I do not envision.

The efficiency ration being about 25%--about half of that of industry--is direct result of of that fat interest rate spread. While that is great, it doesn't add to how defensive this business is.
We all knows far less about the Seattle market. While employment has held up really well, export market too, just don't know how it'll affect the portfolio of loans. That jumped about 2.5% on total loan outstanding in just the past quarter, even without general weakness of the local economy. What if it does weaken? There seems to be more unpleasant news ahead.

That said, I am a shareholder. What do I know?

Best, Sam

[j_remington]

At $12 pps this stock is undervalued.

[biomedlives]

Now (end of the second quarter) non-performing assets are up to $103 million, with a $14 million loan loss reserve. I would want to see the NPA figure coming down before I invested.