Big charge offs at City Bank

City Bank (CTBK: 10.10 -0.32 -3.07%) of Lynnwood, WA released their 2nd quarter earnings today, 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 it’s 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.