City Bank Announces Fourth Quarter and Year End December 31, 2008 Results

City Bank (NASDAQ:CTBK) today announced a net loss of $35.80 million for the year ended December 31, 2008, or $2.27 per diluted share. For the quarter ended December 31, 2008, the net loss was $39.90 million, or $2.53 per diluted share. The primary cause for the net loss for the quarter and for the year was a provision for loan losses of $58.00 million in the fourth quarter and $91.10 million for the year. In 2007, City Bank reported net income of $41.50 million, or $2.62 per diluted share and in the prior year quarter net income was $10.19 million or $0.65 per diluted share. In the prior year, the Bank did not experience significant loan related losses and recorded a provision of $1.10 million in the prior year quarter and $1.93 million for the prior year.

The current year’s net loss is the first annual loss ever reported in the Bank’s 34-year history. City Bank, despite being impacted by these industry wide problems, has always expressly provided for the possibility of such a downturn by maintaining a fortress balance sheet with respect to the Bank’s capital. The following table summarizes the Bank’s Shareholders’ Equity and Allowance for Credit Losses, as reported on a GAAP basis:

The above table indicates that during 2008, the Bank’s Shareholders’ Equity was reduced by the impact of the net loss for the year and the declaration of approximately $8.04 million in dividends. However, during this same period, the Bank built up the allowance for credit losses to $77.03 million. The combined total of Shareholders’ Equity and the Allowance for Credit Losses increased from $220.95 million to $243.15 million. During 2008, the Bank recorded net loan charge-offs of $25.37 million compared to $942 thousand in 2007.

The following is the Bank’s Regulatory Capital and Ratios as of December 31, 2008 and December 31, 2007:

At December 31, 2008 the Bank had Cash Equivalents (in the form of Cash, Cash in Banks, Interest Bearing Accounts in Banks and Federal Funds Sold) which totaled $111.60 million compared to $51.60 million as of December 31, 2007. In January 2009, the Bank has further increased liquidity in the form of Cash Equivalents to $205 million, which represents approximately 14% of total assets.

During the last two quarters of 2008, the Bank experienced a significant increase in nonperforming assets which reflects the reduced ability of home builders to sell product in this period of declining demand. City Bank defines nonperforming assets to include "accruing loans past due ninety days or more, non-accrual loans, including loans where the borrower is making cash payments of interest that we apply to principal in accordance with GAAP, loans which have been restructured to provide a reduction in or deferral of interest or floor rates or principal for reasons related to the debtors financial difficulties, potential problem loans and loan concentrations of related borrowers, and foreclosed real estate.” One of the principal reasons for the declining demand for new homes has been the lack of mortgage financing as a result of the nationwide turmoil in the financial and housing markets. The combination of these forces coupled with the Bank’s focus on residential real estate construction lending have led to significant increases in nonperforming loans and an unprecedented loan loss provision of $91.10 million for the year ended December 31, 2008, compared to the 2007 provision of $1.93 million. As of December 31, 2008, nonperforming assets totaled $679.78 million, which represented 50.30 percent of total assets. At year end, the allowance for loan losses was $77.03 million, which represents 6.83 percent of total loans.

The following table summarizes the Bank’s loan portfolio with the primary growth during 2008 in the commercial real estate area, which continues to perform. The balance in real estate construction is lower due to the foreclosure and transfer of loans to foreclosed real estate and an intentional reduction in residential construction loans and loan commitments as the economy slowed.

City Bank’s President and CEO Conrad Hanson noted,

"The fourth quarter of 2008 was the worst housing slump and most adverse economic climate in my 45 years of banking. Our results were severely and negatively impacted by deteriorating credit quality in our residential construction lending portfolio and the unprecedented slowdown in that area. City Bank’s Board of Directors is actively responding to the declining economy by taking aggressive actions to direct the Bank’s management to complete an orderly liquidation of nonperforming assets and to further reduce the Bank’s concentration in residential construction lending. These steps are showing promise, but they will take time to work through and the current environment is highly uncertain.”

"Due to the unprecedented decline in housing prices, and as required by generally accepted accounting principles (GAAP), we evaluated our entire loan portfolio and established our loan loss allowance at a level that reflects marking our loans and real estate assets to current market values, which considers all the estimated costs to sell these assets and reflects interest reversal for debt restructurings and nonaccrual loans. The level of our nonperforming assets is extremely high, however, it should be noted that City Bank has focused on lower and mid-price housing in desirable locations in the Seattle-Tacoma-Everett area. This will present a drag on earnings in 2009, however, we hold a cautiously positive outlook for the mid-term and long-term economy in our market area. We believe that real estate in the Puget Sound area is an asset class that is cyclical and has inherent value independent of the currently depressed market prices.”

"The Bank’s regulatory capital position was reduced by the 2008 loss, however, the Bank’s Board of Directors believes that the aggregate levels of regulatory capital provide a strong foundation for City Bank to work through the Bank’s high level of nonperforming assets. The key challenge for the Bank is to continue the orderly liquidation of nonperforming assets and to improve the Bank’s liquidity position.”

Net loss for the year ended December 31, 2008 was $35.86 million compared to net income of $41.49 million in the prior year, primarily due to a higher provision for loan losses of $91.10 million compared to $1.93 million for 2007. On a diluted per share basis, net loss was ($2.27) compared to $2.62 in 2007. Net interest income (loss) after provision for credit losses was ($32.08) million for 2008 compared to $79.97 million for 2007.

Net loss for the three months ended December 31, 2008 was $39.89 million compared to net income of $10.19 million in the prior year’s fourth quarter, primarily due to a higher provision for loan losses of $58.00 million compared to $1.10 million for the same quarter of 2007. On a diluted per share basis, net loss was ($2.53) compared to $0.65 in the comparable period in 2007. Net interest income (loss) after provision for credit losses was ($49.67) million for the three months ended December 31, 2008 compared to $19.29 million for the same period in 2007.

Result of Operations

Interest income for the twelve months of 2008 was down 17.33% from the comparable period in 2007. As a result of the weakening residential real estate market, the Bank’s nonperforming assets increased from $34.49 million at December 31, 2007 to $679.78 million at December 31, 2008. Accrued interest of $7.64 million was reversed from income for the twelve months ended December 31, 2008 due to the transfer of nonperforming loans to non-accrual status. Also contributing to the decrease in interest income was the decline in short term interest rates during the latter part of 2008 (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 twelve months ended December 31, 2008 was 8.29%, down from 11.11% for the same period in 2007, and net interest margin decreased to 4.71% compared to 7.27% in the same period in the prior year.

Interest expense for the twelve months ended December 31, 2008 increased 4.36% to $41.78 million over the $40.04 million recorded in 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 2008. The average cost of deposits and borrowed funds for the twelve months ended December 31, 2008 decreased to 4.04%, down 49 basis points from 4.53% for the same period in 2007, reflecting a lower rate environment. Average interest bearing deposits and borrowed funds for the twelve months ended December 31, 2008 were $1.04 billion, a 17.18% increase over the $883.11 million average for the comparable period in 2007.

Non-interest income of $4.62 million reflects a net increase of $1.97 million or 74.31% for the twelve months ended December 31, 2008 over the twelve months ended December 31, 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. Another major contribution to non-interest income was an increase of $1.09 million in net gains from sale of loans compared to the same period of 2007.

Non-interest expense of $27.65 million in the twelve months of 2008 reflects a net increase of 52.08% or $9.47 million over the same period in 2007. The majority of the increase relates to loss and expense on foreclosed real estate which increased by $9.84 million over the same time frame in 2007. FDIC insurance expense increased by $445 thousand compared to the same period in 2007, which is a function of the Bank’s increased level of deposits and the higher rate of assessment applied to all banks as a result of the national banking crisis. The Bank also recorded an expense for unfunded loan commitments $1.40 million for the twelve months ended December 31, 2008. Salary and employee benefits also decreased by $2.44 million compared to the same period in 2007, due to the reduction in the level of incentive compensation. There was also a decrease in state and local tax expense of $833 thousand for the twelve months ended 2008, relating to a state tax matter in 2007.

At December 31, 2008, total assets were $1.35 billion, up 6.73% over December 31, 2007. Total Loans decreased by 2.33% to $1.14 billion at December 31, 2008 compared to $1.16 billion at December 31, 2007. At December 31, 2008, deposits increased 25.87% to $1.09 billion compared to $864.49 million at December 31, 2007.

City Bank’s return on average assets for the twelve months ended December 31, 2008 was negative -2.78% compared to 3.64% for the same period in 2007. Return on average equity was negative -16.58% for the twelve months ended December 31, 2008, compared to 19.82% for the same period in 2007. The ratio of average equity to average assets (Tier 1 Capital) for the twelve months ended December 31, 2008 was 16.77% compared to 18.39% for the same period in 2007. The Tier 1 Capital Ratio decreased slightly due to the increase in the Bank’s total provision for loan loss for the period ended December 31, 2008. The Bank also declared a regular quarterly cash dividend of $0.06 per share during fourth quarter of 2008, which was a reduction from the $0.15 per share declared in each of the prior three quarters 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, 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.