First State Bancorp. Q1 2009 Earnings Call Transcript

| About: First State (FSNM)

First State Bancorp. (OTC:FSNM) Q1 2009 Earnings Call April 27, 2009 5:00 PM ET


Michael R. Stanford - President and Chief Executive Officer

Christopher C. Spencer - Senior Vice President and Chief Financial Officer

H. Patrick Dee - Executive Vice President and Chief Operating Officer


Joe Stieven - Stieven Capital

Bain Slack - KBW

Jordan Hymowitz - Philadelphia Financial


Welcome to the First State Bancorporation First Quarter Results Conference Call. 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 conference over to Mr. Chris Spencer, Chief Financial Officer. Sir, you may begin.

Christopher C. Spencer

Thank you very much and welcome everyone to our first quarter 2009 conference call. First State Bancorporation will provide an online simulcast to this call on our website at and an online replay will follow immediately afterwards and continue for 10 days. There will also be a replay of this call for 10 days at 888-562-8235.

Your host and conference leaders for this call this afternoon are myself, Christopher C. Spencer, Senior Vice President and Chief Financial Officer; Michael R. Stanford, President and Chief Executive Officer and H. Patrick Dee, Executive Vice President and Chief Operating Officer.

The Board of Directors of First State Bancorporation has 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.

With that our agenda this afternoon, we will start out with Pat Dee giving some overview comments of the quarter, I will go through the remainder of the financial slides that are available on our website. Pat will conclude with some summary comments, and then we will open the line for questions from our analysts.

So with that, I’ll turn it over to Pat.

H. Patrick Dee

Thank you, Chris. Our results this quarter were highlighted by outstanding deposit growth and a continued build of our allowance for loan losses. Our core deposits increased by close to $160 million for the quarter and we put over $33 million into our allowance for loan losses, while charging off just $13 million.

We now have about $55 million in our allowance for loan losses that does not count in our capital calculation, giving us an extra buffer against any future charge-offs. We saw a dropped in our loan totals of about $50 million during the quarter, due primarily to significant reductions or payoffs of existing credits. The combination of our deposit growth and the decrease in our loan totals substantially improved our liquidity during the quarter.

With the restatement of our year-end numbers to establish an allowance for our deferred tax asset, we recorded no tax credit in the first quarter and anticipate no tax credit or expense for the near future.

At this point, our Tier 1 risk-based capital ratio and our leverage ratio are both in the well capitalized range, but our total risk-based capital is in the adequate range. We are on track to sell our Colorado branches during the second quarter to great Western Bank, and the resulting gain on that sale along with the corresponding reduction in our loan totals should bring our total risk-based capital ratio back to the well capitalized category.

Asset quality continues to be a significant issue for us. In the first quarter, we saw significant increases in and our non-performing and our potential problem loans with those additions, coming in the January to February timeframe.

We have continued to aggressively assess our long portfolio, especially our construction loans and that process has led us to classify additional credits, move more loans to the non-performing category and add further to our allowance for loan losses.

We have now identified close to half of our Utah loans, as either being classified or on our watch list and feel that there is limited potential for further deterioration in that portfolio overall.

We continue to have success in liquidating a fair number of non-performing or potential problem loans and have a pretty good pipeline of further reductions for the next few quarters.

Clearly, the first quarter saw far more loans moving into the troubled categories than those going out. But, in March we saw a reversal of that trend and giving us some hope that the worst may now be behind us.

Some of our asset quality metrics decreased during this quarter due impart to reclassifications caused by the pending sale of our Colorado branches.

We will be keeping the Colorado non-performing loans in the entire construction loan portfolio from that state, which contains most of our potential problem loans.

All of the assets that are to be sold are now classified as available for sale along with about $8.5 million in the allowance for loan losses that is associated with those loans. The allowance for loan losses attributable to the available for sale loans is now netted directly against those loans, and is no longer reflected in the allowance itself resulting in a drop in the coverage ratio of our non-performing loans.

The allowance is now 56% of our total non-performing loans, which we believe is sufficient in light of the real estate collateral that we have backing 95% of those loans.

As the unemployment numbers continue to climb nationwide, the numbers in our markets continue to run lower than the nation as a whole. In general, our markets are characterized by more stable economic numbers than mini parts of the country.

We have very little exposure to consumer loans and we have almost no credit card exposure. Accordingly, we expect to see little impact in the future from general consumer credit defaults, such as those that are affecting many banks.

With the pending sale of our Colorado branches, we have a plan for increasing our capital ratios by roughly the same equivalent as a $60 million capital raise. As a result of that and our concern over the terms that might be attached to it, we withdrew our TARP application this past quarter. We believe that we can and should remain independent, and continue to operate without any government ownership of any type.

Now we'll have Chris run through some of the detail on our results for the quarter, and then I'll come back and summarize a few thoughts.

Christopher C. Spencer

Thanks, Pat. For those of you that have the slides available, if you want to turn to those slides. Total assets were up $105 million in the first quarter ending at $3.549 billion. The increase was driven by $180 million increase on our cash balances, which resulted from increased deposits and reductions in the loan portfolio during the quarter.

Total loans at March 31, were $2.704 billion, down $50 million from December 31, which includes $5.9 million increase in mortgage loans available for sale. Mortgage loan activity has been very brisk in the first quarter driven primarily by refinancing activity.

We continued to focus on reducing not only our non-performing numbers but to also reduce the overall loan portfolio to strengthen our capital ratios. Geographically, our loans declined in three of the four states with only a modest increase in the Arizona portfolio.

On a pro forma basis, if the Colorado sale were closed at March 31, the overall portfolio would decrease by an additional $406 million to $2.297 billion. As Pat indicated, earlier anyone not familiar with the details of the sale, Great Western Bank is not purchasing any of the non-performing loans or any real estate construction loans, and is not acquiring our Colorado mortgage division. The Colorado mortgage division will be shutdown by the end of the second quarter.

Total deposits at March 31, were $2.727 billion, up $204 million from December 31. This increase included approximately $40 million in additional broker deposits issued in the first quarter, resulting in an increase in core deposits as Pat referred to of approximately $160 million. Also included in the increase in deposits in the first quarter is approximately $40 million from an existing customer balances that move to deposits from our repurchase agreement product, which is classified as a borrowing.

The increase in deposits in the first quarter was driven by strong increases in both New Mexico and Colorado. The decrease in Arizona totals over the last several quarters is due primarily to one significant customer with approximately $25 million in deposits which were cyclical in nature, not an overall down trend or loss of customers.

Utah balances continue to decline, which is expected given the closure of our branches in Utah in October of '08. We experienced a strong increase in non-interest bearing deposits as well, rising $44 million in the quarter to the highest level since June 30, of last year.

Both New Mexico and Arizona saw increases in non-interest bearing deposits with New Mexico seen an increase of almost $49 million. Had the Colorado sale closed on March 31st, the deposit totals would have been reduced by $480 million.

The only deposits not been acquired by Great Western are our CDARS deposits, which totaled approximately $56 million and are required to stay with the originating charter, and therefore cannot be sold.

We are reporting a net loss for the first quarter of $24.4 million primarily as a result of the $33 million provision for loan losses, based on higher levels of non-performing and problem loan levels early in the quarter.

Our net interest margin declined in the first quarter, which I will discuss in more detail with the next slide. Non-interest income was up significantly and included $2.7 million in gains on the sell of our investment securities and an increase of $614,000 on the sale of mortgage and SBA loans. Non-interest expenses declined $1.6 million in the first quarter despite an increase in legal and consulting expenses related to the Colorado transaction of $350,000 and an increase in FDIC premiums of $700,000.

A significant driver of the reduction in non-interest expenses is salary expense, which declined for the fourth consecutive quarter, as we continue to drive (inaudible) throughout the organization. At December 31, 2008, we provided an allowance against our deferred tax assets to reduce the total to an amount equal to the taxes paid in previous years that we could recover through carry backs.

We also provided additional allowance against the net deferred tax assets generated in the first quarter, which precluded recording the tax benefit against the loss. We do not anticipate recording any tax expense or benefit for the remainder of 2009. We will potentially be able to reverse some or all of the allowance against deferred taxes, when we are able to establish that we will have sufficient taxable income in the future.

The net interest margin compressed in the quarter by 43 basis points from the fourth quarter last year due to several factors, including loan repricing from the Fed rate cuts in the fourth quarter, the impact of additional non-performing loans in the first quarter, lower yield on our increased cash balances and higher rates on our FHLB borrowings, which were lengthened in maturity.

We reposition some of our balance sheet primarily to improve our short-term liquidity position. We anticipate that our net interest margin will stabilize in the second quarter is the majority of the impact of the Fed rate cuts from last year has already occurred that will probably be a little lower in the next quarter.

As Pat stated earlier, total risk-based capital is currently in the adequate category and will return to well capitalized at the bank and the consolidated Bancorporation level with the closing of the Colorado transaction, which is scheduled for late June.

Had the sale of Colorado closed at the end of the first quarter, total risk-based capital with consolidated level would have been 11.2% with a Tier 1 leverage ratio of 5.9%. Had the sale of Colorado closed at the end of the first quarter total risk-based capital at the bank level would have been 11.3% with the Tier 1 leverage ratio of 7.3%.

The efficiency ratio rose slightly in the first quarter, despite a decrease in non-interest expenses and an increase in non-interest income due primarily to the compressed net interest margin.

We experienced an increase of $44 million in our non-performing assets from December 31st with all of the increase coming in January and February and the $7.5 million decrease in the month of March. A decrease in other real estate owned in March accounted for approximately half a $7.5 million decline in non-performing assets in March.

We continue to be able to build real estate once it is been foreclosed. Approximately 50% of the OREO balance is continued to be comprised of principally operated branch facilities and excess land purchased for expansion.

The large increase in our non-performing loans in the first quarter came primarily from the real estate construction segment of the New Mexico portfolio. At March 31st the non-performing loans were 40% in New Mexico loans, 28% Colorado, 26% Utah and 6% Arizona. Non-performing loans by type remain fairly consistent with real estate construction being the major contributor at 71%.

The construction loan portfolio continues to decline dropping $13.4 million in the first quarter and over $100 million since the second quarter of last year. Exposure by state remains relatively unchanged from the prior quarter with 53% of the total being in New Mexico, 20% Colorado, 19% Utah and 8% Arizona.

The breakdown by type of loan is also relatively unchanged. One of the bright spots in the quarter was the decrease in the delinquent loans at March 31, which declined by $45.5 million or roughly 60%.

However this was due in large part to fact that a portion of the delinquencies from December became non-performing loans in the first quarter. The good news is that these loans are not replaced with new delinquent loans.

Three of the four states experienced decreases in delinquent loans, with Colorado being the only state to see an increase moving to 2.5% of its total portfolio from 1% at December 31.

The allowance for loan losses ended the quarter at $91.2 million, an increase of 11.5 million, however, 8.5 million of allowances reclassified and netted in other loans available for sales related to the Colorado transaction. The allowance represents 4.01% of total loans held for investment and 56% of non-performing loans.

Again as Pat indicated at March 31, we had roughly $55 million in our allowance that has not been accounted for capital purposes due to the regulatory limitation.

Net charge-offs for the first quarter totaled $13.2 million with 70% of those charge-offs coming from construction and vacant land loans. Annualized charge-offs for the first quarter was 1.96% compared to 0.88% for 2008.

The provision for the quarter was $33.3 million, and was the main reason for the loss in the first quarter. This provision was incurred primarily in January and February with the significant increases in nonperforming loans in those months, but the provision decline significantly in March. The provision for the months of January, February and March was $18 million, $11 million and then declining to $4.3 million in the month of March.

All right. This concludes my comments on the slides. With that I'll give it back to Pat for some summary comments.

H. Patrick Dee

Thank you, Chris. We continue to be focused on improving our capital ratios and improving our bottom-line results. We will keep our attention squarely on taking the actions needed to reduce our problem loans and minimize the losses associated with those.

We believe that second quarter of 2009, will likely show further additions to our allowance for loan losses, but hopefully at a much lower level than the first quarter with further gradual improvements during the remainder of the year. We will maintain our efforts to increase our deposit totals and further improve our liquidity.

With that I will open it up for questions from our analyst.

Question and Answer Session


(Operator Instructions)

We do have one question from Joe Stieven from Stieven Capital. Go ahead, sir.

Joe Stieven - Stieven Capital

Hey Pat. Hey, Chris.

H. Patrick Dee

Hi Joe.

Christopher C. Spencer

Hi Joe.

Michael R. Stanford

And what about me, Joe?

Joe Stieven - Stieven Capital

Oh, I didn’t know you were there, Michael. How are you? Chris could you give us, first question just statistically, can you give us your Tier 1 ratio for both the consolidated and bank on a pro forma basis, teir-1 the risk weighted assets, that’s number one. And number two is, obviously you guys had your regulatory agreement to get to a certain number and I'm assuming that all of this is all being done under the watchful eyes of regulators. Can you just sort of comment on how that process is going? Thanks guys.

Christopher C. Spencer

Joe, I don’t have the pro forma for Tier 1. Obviously in the slides, there is the leverage ratio. I can send out the Tier 1 ratio on a pro forma basis for both the holding company and the bank.

Michael R. Stanford

Joe, were you looking for a pro forma including the gain on sale of the Colorado branches?

Joe Stieven - Stieven Capital

Exactly, yes. Yeah.

H. Patrick Dee

At this point the gain on that sale is ballpark, going to be around $20 million, which in this case both pre and after tax is the same number since we are not booking any tax benefit. So, that would obviously have a pretty significant impact on all of those capital ratios.

Joe Stieven - Stieven Capital

Okay. I was just trying to get the pro forma numbers with the sale and everything. And then the other thing is, if I am not mistaken, just a little bit short on the one capital ratio, I guess that the regulators wanted you guys to have and then, correct?

H. Patrick Dee

Right. As part of our informal agreement, they have asked us to get to a 12% total risk base capital ratio at the bank level, and the Colorado transaction won't be enough to put us to that level. What it will be dependent on over the next, probably anywhere from 6 to 18 months is to continue to manage our balance sheet, hopefully to improve that capital ratio a little bit. If the market returns and some type of equity offering becomes viable or capital offering of any type, we will certainly consider that. And hopefully at some point we will be able to return to a level of profitability.

In this first quarter of this year including the securities gains, we have just short of $9 million in pre-provision and in this case pretax income. So, if we can get our provision down to a more nominal level, then we can start increasing our capital again through earnings. So, we will be working with the regulators to put together a plan to exceed that in the not too distant future.

Michael R. Stanford

When you look at it, as we reposition the footprint we will have $500 million roughly around there that are left over in Utah and Colorado that we can and will runoff or dispose off or have leave our balance sheet and then redeploy that to our new footprint back to New Mexico and Arizona. So, that have a good liquidity and capital boost to us through that action loan and allow us to be stronger on taking market share in our legacy market and as opportunities present themselves, since we don't have much exposure in Arizona, we can take advantage of a few things down there.

So, I’m not looking for the capital markets to come back that fast. Our advantage is really around what we can dispose of because we are exiting completely those two markets.


Our next question is from Bain Slack. Your line is open from KBW.

Bain Slack - KBW

Hi, good afternoon.

Michael R. Stanford

Hi, Bian.

Bain Slack - KBW

Hi, the pro forma numbers are giving were obviously with the close of the Colorado transaction, but I’m assuming that it’s not including the expected continued runoff in the long portfolio?

Michael R. Stanford

That's correct.

Bain Slack - KBW

Okay, and I guess, if you all could just give us an idea, I think you all did this a little bit year in terms of may be between now and the end of the year, or if you get it on a quarterly basis kind of what that expected runoff could be given the loans that will be comeing up for renewal and maturities and things like that?

H. Patrick Dee

I think overall Bain and probably the best indicator is, what we accomplished in the first quarter with a $50 million reduction in loan totals to be extend we’re a little more successful with liquidating some of the problem credits, we could see that number move a little bit higher, but I think the $50 million per quarter is probably the minimal level that we would see in terms of reduction in the rest of the year.

Bain Slack - KBW


Michael R. Stanford


Bain Slack - KBW


Michael R. Stanford

Bain, I think we’ve built a pretty good pipeline also around the run-off in the problem assets, either upgrade exiting the bank. So using Pat’s number would be a very, very conservative number. If we take conservative approach to that that problem asset pipeline, it could add another $100 million to it.

Bain Slack - KBW

Okay, great. Thanks, thank you.


(Operator Instructions). We have one more question from Jordan Hymowitz with Philadelphia Financial. Your line is open.

Jordan Hymowitz - Philadelphia Financial

As your reserve is now 4% and a percent of loans pro forma, arguably that will grow as your portfolio shrinks, if you did nothing else. I guess from a general point of view, do you think that's enough or do you see that reserve being built further other than from the natural deterioration or decline of your loan balances.

H. Patrick Dee

Well, most likely we do think that number is likely to increase at least a little bit in the remainder of the year. But, most of that impact is going to come from a reduction in the loan totals, as opposed to a further built in the allowance.

Jordan Hymowitz - Philadelphia Financial

That's the point I was getting at, so you think at this point that you're basically going to provision approximately charge-offs in any reserve build at this point will just come because the portfolio has shrank.

H. Patrick Dee

Most likely, we will monitor the charge-off level and the further trends in the problem and potential problem loans, but at this point we wouldn’t expect to have a reserve build at least at the same size that we had in this first quarter. We may build at a little bit above what we are charging off especially in the next quarter to eventually we think we’re feeling like we are pretty close to the point where we probably only be charging or providing about what we are charging off.

Jordan Hymowitz - Philadelphia Financial

Okay. That said and I don’t need to follow-up with you guys. I appreciate the conference call.

Michael R. Stanford



I am showing no further questions at this time.

H. Patrick Dee

We certainly appreciate everybody's time today in listening in on our call. We recognize our results in the first quarter were not what we had hoped for but we believe we’ve made a lot of the tough decisions to again continue to build our allowance for loan loses, so that we can return to a more normal earnings faster going forward.

We do see some trends in pick up in activity in certain parts of our real estate market centered around the residential housing. There are others pieces that continue to be very slow, but it looks like there is a little more interest from active buyers for residential construction and even lots in some cases in some of our markets. So, we are far from completely having turned the corner at this point, but again we think there is, some positive signs out there that bode well for us later on this year.

Again as always, we appreciate your time and attention and we look forward to speaking with you again next quarter. Thanks.


Today's conference has concluded. Thank you for joining. You may disconnect at this time. The call has ended.

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