After selling a profitable technology subsidiary for a tidy sum, City Bank in Lynnwood, Wash., had so much cash to spare that it passed on $30 million to shareholders.
On Oct. 13 the $809 million-asset City Bank declared a special cash dividend of $3 a share, after its August sale of Diligenz Inc., an online provider of Uniform Commercial Code-related services, netted $27.5 million of cash. The special dividend was on top of a regular quarterly dividend of 20 cents a share. Both are payable Jan. 6 to shareholders of record as of Nov. 25.
“We felt that we had accumulated significant capital, and that this was an efficient way to distribute that capital back to shareholders,” said Conrad Hanson, the president and chief executive.
Louis Feldman, an analyst at Hoefer & Arnett Inc. in Portland, Ore., said overcapitalized companies from time to time have declared special cash dividends to shed some of their equity.
Community banking companies that have paid special dividends in the last several years to shed excess capital include the $1.3 billion-asset Marquette National Corp. in Chicago and the $1 billion-asset Merchants Bancshares Inc. in South Burlington, Vt.
This is not the first time City Bank has declared a special dividend. It paid shareholders dividends of $1 a share in September 2003 and in November of last year.
Its Tier 1 capital ratio was 23.84% on Sept. 30, roughly double the average ratio for banks its size. Mr. Feldman said that City Bank tends to hold more capital than other banks because it specializes in making risky build-to-suit construction loans to custom builders of commercial and residential properties. Over half of its $674 million loan portfolio is in construction and land-development loans.
“They’re very successful at it, but they like to be very well capitalized to satisfy any concerns that regulators may have” about the line of business, Mr. Feldman said.
Because of its strong loan growth, City Bank’s third-quarter net income from continuing operations rose 30.58%, to $6.41 million. Its credit quality remained healthy, with a 0.57% ratio of nonperforming assets to total assets in the third quarter. The average ratio for banks its size was 0.67% as of June 30, according to the FDIC.
James Bradshaw, an analyst at D.A. Davidson in Portland, said that many banks tend to reduce their capital ratios by buying back shares, but special dividends can increase the loyalty of shareholders — particularly since they also carry favorable tax rates.
Analysts and investors alike were surprised by the abrupt sale of Diligenz, particularly after City Bank officials said in June that the bank had planned to build its online subsidiary into the nation’s premier provider of UCC-related services. City Bank acquired the budding dot-com in 1998 and then spent about $10 million to make it a leading provider of such services, and a big contributor of noninterest income for City Bank.
In his interview last week, Mr. Hanson said that Diligenz was sold to one of its competitors, Corporation Service Co. of Wilmington, Del., which had offered City Bank a premium that was too good to refuse.
