First State Bancorporation Q4 2008 Earnings Call Transcript

| About: First State (FSNM)

First State Bancorporation (OTC:FSNM) Q4 2008 Earnings Call February 2, 2009 10:00 AM ET


Christopher C. Spencer – Chief Financial Officer, Senior Vice President & Chief Accounting Officer

Michael R. Standford – President, Chief Executive Officer & Director

H. Patrick Dee – Chief Operating Officer, Executive Vice President, Treasurer & Director

Jed Fanning – Chief Credit Officer


Bain Slack – Keefe, Bruyette & Woods


Welcome to the First State Bancorporation’s fourth quarter earnings conference. At this time all participants are in a listen only mode. (Operator Instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time. I would like to turn today’s call over to Mr. Chris Spencer, Chief Financial Officer.

Christopher C. Spencer

Welcome everyone to First State Bancorporation’s fourth quarter 2008 conference call. First State Bancorporation will provide an online simulcast of this call on our website at and an online replay will follow immediately and be available for 10 days. There will also be a replay of this call for 10 days at our toll-free number 800-876-4361.

Your host and conference leaders for this call are myself, Christopher C. Spencer, Senior Vice President and Chief Financial Officer; Michael R. Standford, President and Chief Executive Officer; H. Patrick Dee, Executive Vice President and Chief Operating Officer; and Jed Fanning, Chief Credit Officer of First State Bancorporation.

The board of directors of First State Bancorporation have adopted the policy that the company will comply with Securities & Exchange Commission Regulation FD in all respects. Consequently, this call will proceed under an agenda which I will announce momentarily. Matters outside of the agenda will not be discussed.

The subject matter of this conference call will include forward-looking statements, these statements are not historical facts and involve risks and uncertainties that could cause First State’s results to differ materially from those contained in such statements. Our agenda this afternoon, we’ll start with an overview of the quarter with Pat Dee, I’ll after that give some color on some of the financial numbers in our slide presentation that’s available on the website. Pat will give some summary comments after that and then we’ll open it up to questions from our analysts.

With that, I’ll turn it over to Pat.

H. Patrick Dee

We’re pleased to report that despite a continued somewhat rocky road on the asset quality front, we have maintained our capital above the well capitalized requirements of the regulators. We have seen a continuation of the recent trend of higher levels of non-performing loans and have increased our allowance per loan losses accordingly to the point where we now have about $42 million in our allowance that is over and above the amount that we can include in our capital calculation.

We are seeing some differences in the asset quality of our various markets and we’ll provide a little more color on that during this call. Overall, the economic numbers in our New Mexico and Colorado markets are generally better than many parts of the country especially when it comes to unemployment figures. New Mexico reported unemployment at just 4.9% in December of 2008 and Colorado reported 6.1% compared to the national numbers of 7.2%.

Even the Phoenix MSA at 6.3% is running well below the national average. The statistics on housing both in terms of available supply and price stability continue to be generally better in New Mexico and Colorado compared to national figures. In spite of the additional provision for loan losses that we recorded in 2008, our tangible book value at year end was $8.51 per share.

We are extremely disappointed to see our stock prices at the levels that it has been recently and are working very hard to restore the apparent lack of confidence in our stock that the market is reflecting. One of our objectives for this year is to manage our asset totals downward in order to improve our capital ratios to an even stronger level. As we have talked about previously, we have substantially curtailed certain types of lending and have exited the Utah market entirely.

As we have moved further in to the Utah portfolio liquidation, we have found that our decision to leave that market was a wise one as we have a disproportionate number of problem loans in that state. We will continue to reduce our exposure to construction loans of all types and we should see a more marked decrease in our loan totals in Utah in the quarters ahead.

Most of the loan metrics that we look at indicate that our more serious problems have been and continue to be centered in the Utah portfolio. Non-performing loans in Utah as a percent of total loans in that state were just under 15% as of 12/31/08 compared to an overall ratio of just over 4% for the entire company. Also, the spike in our loan delinquency rate was concentrated in Utah as close to 60% of the delinquencies at year end were in the Utah portfolio even though it represents less than 10% of our total loans.

The delinquency numbers are not as bad as they might seem at first glance, as about $14 million of the past dues involved loans that were past maturity where the customer was unable to get in to sign their renewal documents prior to year end. One thing that we have tracked in 2008 is the level of charge offs recorded on construction loans compared to the original face amount of the note.

We did this for all types of construction and land loans and separated the figures by state. Our largest dollar amount of construction loan charge offs occurred in Utah and that state also had the highest charge off level as a percent of the original face value of the note at just under 30%. Said another way, when we did incur a charge off on a construction loan in Utah the charge off amount averaged about 30% of the original loan amount. The comparable percentage in the Mexico and Colorado were about 15% and 9% respectively.

That is just one of the reasons why we believe our allowance for loan losses is adequate at about 67% of total non-performing loans since roughly 77% of our non-performing loans are construction loans. Now, if our markets continue to deteriorate we would expect those charge off percentages to increase somewhat but to date we believe those figures show that our original underwriting criteria have helped control our losses even in a soft market. Keep in mind also that we have not seen the same magnitude of price declines in our markets that other markets have experienced.

Another area of concern nationally is commercial real estate of various types. We’ve done a significant amount of commercial real estate financing both owner and non-owner occupied. To date that portfolio has preformed quite well with nominal levels of delinquency, problem loans and charge offs. We think that reflects the relative strength of the commercial real estate markets we are in especially New Mexico and Colorado where the bulk of those types of loans were originated.

We will continue to monitor that portfolio in the future but we believe that our underwriting will serve us well even if those markets soften in the future. I would like to point out that we have relatively little exposure to consumer loans and have no significant credit card exposure. Accordingly, we should see little impact in the future from general consumer credit defaults.

Throughout 2008 we focused on reducing our non-interest expenses and increasing our non-interest income. We’ve been successful in both of those efforts especially in staffing expenses and certain fee income categories. Our total employee count today is about 10% lower than a year ago and we will continue to look for ways to improve our efficiencies in the months ahead.

Last quarter we mentioned that we had applied for TARP funding from the treasury department. To date, we know only that our application is still in process. Give the transition that has recently taken place in Washington and the fact that many of the available TARP resources have been allocated to the largest banks and even some non-banks it may be some time before there is a final disposition on this. In the meantime we are proceeding with plans to increase our capital ratios without any assistance from the treasury.

At the end of December, we filed an S-3 Shelf Registration statement that could be used for a variety of capital offerings that we might undertake. Due to the drop in our stock price in the fourth quarter we would not have been eligible for an S-3 filing much beyond year end 2008 so we made the decision to file at that time so that we would be as well prepared as possible for any opportunity to issue capital that might arise.

Now, Chris will run through some of the detail on our results for the fourth quarter and the year and then I will summarize a few thoughts.

Christopher C. Spencer

We are reporting an operating loss for the fourth quarter of $8.5 million, driven primarily by a loan loss provision of $23.4 million. Total loans were reduced by $6.5 million as we seek to lower the overall portfolio and increase capital levels. Despite the loss in the quarter, to reiterate Pat’s comment, the company remains above the 10% regulatory well capitalized threshold at 10.31% and a ratio of 10.33% at the subsidiary bank level.

Total assets ended the year at $3,444,000,000, down $24 million from the third quarter and $20 million over year-end 2007. The decrease in the fourth quarter coming primarily from lower loan totals and an increase allowance for loan losses. Total loans at December 31, 2008 were $2,754,000,000 which as I mentioned previously were down $6.5 million in the fourth quarter and to put the fourth quarter in perspective, during the first three quarters of 2008 loans grew a total of $220 million there by accomplishing our objective noted in the third quarter to slow the growth of the overall portfolio.

We will continue to focus on reducing the overall size of the portfolio while continuing to serve the loan needs of our core customers. Geographically the change in loan totals is mixed. Loans are down in New Mexico and Utah, the largest decrease being Utah which is expected since we have closed the Utah operations. Loans increased in Colorado and Arizona, Arizona having the largest increase and also the state with our lowest level of non-performing assets.

Total deposits at December 31, 2008 were $2,552,000,000 up $25 million from the third quarter. However, the increase in the fourth quarter included an increase in brokered deposits of approximately $145 million. Exclusive of brokered deposits, our core deposits were off in the fourth quarter by approximately $120 million. Although we are disappointed in the decline in core deposits, it is less than the $150 million decline that we experienced in the third quarter.

Brokered deposits at December 31, 2008 totaled $191 million or approximately 7.6% of total deposits. By state there was really no significant change in the dispersion of our deposits. On the non-interest bearing front, non-interest bearing deposits ended the year at $453 million down $23 million on the quarter reflecting and mirroring the overall decrease in core deposits. Non-interest bearing deposits by state both Colorado and Arizona saw slight increases in non-interest bearing deposits in the fourth quarter.

The bottom line for the fourth quarter again was an $8.5 million loss or $0.42 per share. The loss was driven primarily by the $23.4 million provision for loan losses. Outside the provision there was relatively little noise in the numbers. The net interest margin was down modestly which we’ll talk about in more detail with the next slide. Non-interest income was up $600,000 over the third quarter and included a $220,000 increase in service charges on deposit accounts.

Non-interest expenses were up $1.3 million from a $220,000 increase in FDIC premium assessments, $320,000 from two large fraud losses and a $340,000 write down of the Heritage Place OREO property in Broomfield Colorado from the Heritage acquisition that is now under contract to sell with the scheduled closing in the third quarter of this year.

The net interest margin compressed in the quarter by 17 basis points from the third quarter as a result primarily of the two significant fed rate decreases in the quarter which totaled 175 basis points. Given the largest rate decrease came mid December, we anticipate that the margin will compress again in the first quarter which we estimate at 20 to 25 basis points in additional compression.

The ability to decrease deposit rates during the last several months has been challenging due to market conditions. However, our borrowings are currently heavily weighted to short term maturities which has resulted in a significant reduction in costs. In addition, our trust preferred securities are tied to LIBOR which has resulted in significant reduction in the quarter as well.

Our return on assets and return on equity are both negative in the quarter because of the loss. Going to the efficiency ratio for the year was 73.4% and 76.8% in the fourth quarter. Although we continue to make progress in controlling non-interest expenses, the ratio for 2008 is up from the 2007 level of 69.43% primarily due to the compressed net interest margin. If we had the same yield on interest bearing assets and liabilities during 2008 that we had during the fourth quarter of 2007 our efficiency ratio would have been approximately 66.85%, nearly a 10% improvement from 2007.

As Pat indicated in his introduction, we continue to experience increases in non-performing assets which totaled $137 million at December 31st. OREO increased $3 million from September 30th however, we continue to be able to move most properties once they have been foreclosed. Significant activity during the fourth quarter included the write down of the parcel of land in Colorado mentioned previously and the sale of the branch facility in Salt Lake City that we had owned.

Our non-performing loans remain consistent as the geographical dispersion by state with the majority of the increase in the fourth quarter coming from construction loans with roughly half of that increase coming from the Utah portfolio. The one to four family non-performing loans decreased slightly in the quarter. The construction loan totals continue to decline declining $54 million in the fourth quarter and $91 million since June 30, 2008. Exposure by state and by type of construction loan remains relatively unchanged from the prior quarter.

Our delinquent loans increased fairly sharply in the fourth quarter to $75.7 million or 2.75% of total loans. Although, as mentioned earlier approximately $14 million of that was on loans that were renewed just after year end. As Pat indicated earlier, the change in delinquent loans is driven primarily by Utah which increased to $44.6 million at December 31st representing close to 60% of all the delinquencies and 16.45 of total loans in Utah.

In comparison, the delinquent loans in New Mexico, Arizona and Colorado are quite a bit lower as a percentage of the loans in those respective states at 1%, 4% and 1% respectively. The allowance for loan losses ended the quarter at $79.7 million an increase of $11 million and represents 2.91% of loans held for investment and 67% of total non-performing loans.

The net charge offs for the quarter totaled $12 million with the largest amounts once again coming out of Utah. Charge offs from Utah in the quarter totaled approximately $7.3 million or 60% of the total charge offs. On increase charge offs in the quarter, the percentage of net charge offs to total average loans has increased to 86 basis points for the year compared to 19 basis points in 2007. Again, our provision for loan losses was $23.4 million and was the primary driver for our loss in the fourth quarter and excluding the write off for goodwill in the second quarter for the year as well.

With that, I’ll turn it back to Pat for some summary comments.

H. Patrick Dee

In summary, we believe that the market has significantly undervalued our stock. We recognize that we have significant levels or problem loans especially in our construction portfolio and we also recognize that the near term future for many of those loans may not be very good. However, we have aggressively identified those problems, we’ve established a significant allowance for loan losses on those credits and have controlled our ultimate losses on individual borrowers through solid initial underwriting.

We would expect to see a continuation of some of the adverse trends in our loan portfolio in the near future, at least through the first half of 2009 and expect those to continue to be concentrated in the construction loan portfolio especially in our Utah portfolio. Nonetheless, we believe that our current stock price reflects a discount to tangible book value that is absolutely not warranted.

The decline in our stock price has been caused by steady selling pressure primarily from some institutional investors over the past few quarters with the result being a valuation that is in no way based on our actual results or our current financial condition. We are working on various initiatives to reduce our balance sheet totals throughout 2009 in order to improve our capital rations and eventually achieve the 12% total risk based capital level that our regulators have asked.

To date, we have not made any real progress in moving towards that figure so we will be more aggressive in 2009 in reducing our risk weighted assets. We believe that we can achieve the desired capital level without any TARP money and in fact would prefer to not have to utilize TARP funding at all given the uncertainty about future changes in the terms associated with those funds as well as the dilution it would cause our existing shareholders.

We continue to focus on various expense reduction possibilities. We have frozen all salary levels as of the first of the year and we’ll implement a salary reduction for our key executives during the first quarter of 2009. We recognize that 2009 will likely continue to present significant challenges to us but we’re working very hard to return our company to profitability as soon as possible.

With that we’ll open it up for questions from our analysts.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Bain Slack – Keefe, Bruyette & Woods.

Bain Slack – Keefe, Bruyette & Woods

I was wondering if given the conversation that you’ve got on bringing down loan portfolios if you are targeting any specific level of where loans would be at say at the end of ’09 or maybe mid ’09? I guess if you could elaborate on that color a little bit?

H. Patrick Dee

I think Bain the major objective there is to accomplish some run off in a couple of ways. There is the normal monthly amortization from our term real estate portfolio primarily commercial real estate that should amortize down through the year. We’re also continuing to work our construction portfolio in all of our markets. There are some of those construction projects that are going to completion where properties are financing out in to some type of permanent loan off of our balance sheet or are being paid off through the sale of the property so we expect to achieve a fair amount of it that way.

We are continuing to pursue some loan sales. We’ve had some success on kind of a note by note basis, especially in the Utah market of selling some of our problem credits at a discount. We don’t think that’s going to amount to a large amount of money but we are continuing to pursue some of those sales on a case-by-case basis. We are also still talking to one buyer in particular potentially for some of our performing loans. We’re not certain of the outcome of that at this point.

So, we’re looking through a variety of means reducing the loan totals. We’ve set as a target by year end 2009 to reduce loans hopefully a minimum of $200 million, perhaps as much as $300 million by that point. We are continuing to loan a little bit of money in our existing markets. We still need to support our current customer base with their creditworthy requests. For example, in the month of December we originated approximately $22 million in new loan activity.

Our estimate for new loans in 2009 we think is going to curtail from that level simply because we’re just not seeing as many requests at this point in time. So, we need to continue doing a little bit of lending in our markets but again, are working that construction portfolio in particular as well as just the normal commercial real estate portfolios amortization to achieve some of those reductions.

Bain Slack – Keefe, Bruyette & Woods

I guess just to summarize I think what I heard is the $200 to $300 million in runoff, is that net of the slight growth in some of your other stronger markets you’re talking about?

H. Patrick Dee

That’s correct, the $200 would be in that figure.

Bain Slack – Keefe, Bruyette & Woods

I guess obviously bringing that down, especially the high risk weighted assets down within the loan portfolio would certainly help capital. What other levers is management looking to pull to remain well capitalized throughout the year without TARP money and obviously to potentially get to that 12% goal.

H. Patrick Dee

We’ll one of the factors that we’re starting to see come in to play already is a reduction in off balance sheet commitments. As our lending has gone forward we have funded some of those comments throughout 2008 and again, we’re not seeing the level of new requests there so we think those off balance sheet commitments are going to continue to come down.

We’re also hoping that at some point during the year the capital markets will change so that our stock price might be at a more reasonable level than it is right now and could present the opportunity to issue some capital at a rate that would be efficient for our existing shareholders. With our stock price around $1 a share it’s pretty tough to make those numbers work right now. But, we think given a couple of quarters of decent performance in terms of a stabilization of our asset quality trends at some point and clearly at a little calmer or more ration assessment of the value of our stock, it might present the opportunity for us to issue some new capital.

We will continue to consider more substantial asset sales as a potential way to reduce those outstandings as well. We’re trying to take a look at any possibility that we have to improve those capital ratios and do it through a combination of factors that we think will get us to the point that we need to be by year end.

Bain Slack – Keefe, Bruyette & Woods

I guess has there been any update, I know with regard to the TARP conversation it sounds like the application is still in process and you haven’t really heard from the Treasury but I was wondering if there’s been any color of ongoing conversation with your regulators since the agreement was issued?

H. Patrick Dee

Well, at this point relative to the TARP application we’ve really had no significant information from the regulators since about mid December. Clearly, their priorities in granting TARP money have probably been geared towards institutions other than ourselves. There seems to be a geographic disparity in the way that TARP has been issued with a heavy concentration on both costs and obviously the bigger dollar amounts are going to the larger companies.

We are continuing to work with our regulators. Clearly, we’re not pleased with the asset quality trends that we’re seeing but again, we think we’re doing absolutely all of the things that we need to do in terms of bolstering our allowance for loan loss, working those problem assets to control our ultimate loss and at this point we feel that recognizing again, we’ve got some issues with our asset quality that we believe we’re still in good stead with our regulators overall.

Michael R. Standford

Just to add to that dealing with our regulators they’re still supportive of us getting the TARP money so we’re not hearing anything from them, that says they don’t support us in that effort. We’re just kind of getting to the point where with what we’re seeing that’s being politicized around that and the fact that that clause is in there that they can add, change, terms conditions any time they want to I don’t know if that is healthy for us in the future.

I think we’ve got an aggressive plan. Hopefully we can give more color around it in the next couple of months but I think we’ve got a good plan to achieve getting our capital above 12% without that. I’m not sure if we had it tomorrow we would have to have a long discussion before we would just sign up for it.

Bain Slack – Keefe, Bruyette & Woods

The last question which I guess kind of goes back to the delevering was thinking about this [inaudible] portfolio did you have an update on I guess what the cash flow is on that running off and what that may mean in terms of over the next 12 months and the ability to maybe help improve ratios slightly?

Christopher C. Spencer

Cash flow off the investment portfolio is roughly depending month-to-month about $5 to $7.5 million per month.

H. Patrick Dee

Well, it looks like absent any further questions we’d like to thank you for your time and attention today. These are extremely challenging and unusual times certainly for banks in general and our company as well. As we’ve said earlier we believe that the market has significantly undervalued our stock and our efforts are going to be put forth over the next several quarters to right our stock price to a more reasonable level and we think we can achieve that even with the challenges that we face in our markets.

The country as a whole has some economic challenges to face as do the various markets that we operate in. We think that our challenges in our markets are probably going to be less than the nation as a whole and we will continue to identify strategies to work through the problems that we have and ultimately provide a better stock prices for our shareholders. Again, we appreciate your time today. Thank you very much and we’ll look forward to visiting with you again next quarter.


This concludes today’s conference. Thank you for attending. You may disconnect at any time.

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