First State Bancorporation (OTC:FSNM) Q1 2010 Earnings Call July 29, 2010 5:00 PM ET
Patrick Dee - President and COO
Chris Spencer - SVP and CFO
Jed Fanning - Chief Credit Officer
Welcome to the First State Bancorporation Second Quarter Results Conference Call. (Operator Instructions) I would like to turn today's conference over to Mr. Chris Spencer, Chief Financial Officer, sir you may begin.
Thank you very much and good afternoon everyone and welcome to First State Bancorporation second quarter conference call. First State Bancorporation will be provide an online simulcast of this call on our web site which is http://www.fcbnm.com and an online replay will follow immediately after the call and continue for 10 days.
There will also be a replay, of this call for 10 days, which can be accessed toll free at 866-391-4964. Your host and conference leaders for the call this afternoon are myself Christopher C. Spencer, Senior Vice President, and Chief Financial Officer; H. Patrick Dee, President and Chief executive Officer and Jed Fanning, Chief Credit Officer of First State Bancorporation.
The Board of Directors of First State Bancorporation, has adopted a policy that the company will comply with Securities and Exchange Commission regulations FD in all respect. Consequently the conference call will proceed under an agenda which I will announce momentarily. Matters outside the agenda items will not be discussed.
The subject matter of this conference call will include forward-looking statements. These statements are not historical facts and it involves risks and uncertainties that could cause First State results to differ materially from those contained in such statements.
The call this afternoon, Pat Dee will open with some overview or comments regarding the quarter. I will proceed to go over the financial slides that are located on our website. Then Pat Dee will have some concluding remarks.
With that, I'll turn it over to Pat.
Thank you, Chris. The second quarter for our company saw growth in non-brokered deposits, a further improvement in our liquidity and continued contraction in our loan portfolio.
Asset quality continues to be a major challenge, as evidenced by the high level of charge-offs and the provision for loan losses for the quarter. We have been successful in selling quite a few pieces of other real estate owned as the total OREO amount declined, even though we saw significant additions during the quarter.
Because of the losses in the quarter our consolidated company now has a negative stock holders' equity and our bank is now significantly undercapitalized under the regulatory definition.
Our allowance for loan losses stands at 7.05% of total loans, an increase from 6.36% at the end of the first quarter. Of the total of $123 million in the allowance, approximately $101 million is not included in our capital ratios.
Although, our liquidity is now substantial, we continue to monitor and manage it very closely. We continued to add deposits from national deposit listing services during the quarter a primarily to replace broker deposits, which we can not renew due to regulatory restrictions.
Our loan totals continue to decline due primarily to payoffs, which has helped our liquidity improve. Our loan charge-offs increased substantially compared to first quarter reversing the trend that we saw on the two previous quarters. Our provision for this quarter was less than the charge-offs recorded as we charged-off quite a few loans that have specific reserves on those loans at the end of the first quarter.
We continued to aggressively identify problem loans and take write-downs where needed. As in the past most recent appraisals are still reflecting a lower value than the prior appraisals on the real estate, underlying the collateral on our loans. We continue to refine our allowance for loan loss methodology and believe that we are maintaining it at an appropriate level.
During the second quarter, we closed two of our smaller branches, one in the Phoenix area and the other in Las Cruces, New Mexico. Chris will give more detail on our non-interest expenses, which were higher in the second quarter than in the first quarter, with very high levels of folio expense and FDIC insurance premiums.
We continue to pursue sources of additional capital for our bank as that is a critical need for us at this time. We were recently not able to redeem our trust preferred securities at a substantial discount, which if it had occurred would have improved our ability to recapitalize our holding company. Since we were unsuccessful in that effort we have broadened our efforts to include the possibility of raising capital, which maybe contributed directly into the bank.
If a significant capital raise is made directly into the bank it will solidify the bank's capital position that will most likely result in substantial dilution in the holding company's ownership of the bank to probably not more than 5%.
We continue to work closely with our regulators regarding our formal agreement and at this point we are not under any required time frames for increasing our capital. However, it is likely that given our asset quality trends and continued decline in capital, we may need to significantly increase the bank's capital by year-end or at least very soon thereafter.
We recently were unsuccessful in our appeal of the decision by the NASDAQ market to de-list our stock. So as of yesterday, our stock began trading in over-the-counter market.
Now, we will have Chris will run through some of the detail on our results for the quarter, and then I'll summarize a few thoughts.
Very good, thanks Pat. For those of you that have ability to see the slides on our website, I will start with the first slide, total assets. We ended the first quarter with total assets of approximately $2.6 billion, which is down $225 million from the first quarter. This decrease was primarily the result of continued run-off in the loan portfolio and the use of cash to repay $180 million in FHLB advances.
Total loans at June 30th, were $1.7 billion, down $136 million from March 31st, as we continue to experience a steady quarter-over-quarter reduction in the loan portfolio from normal amortization and early payoffs of approximately $20 million to $25 million per month.
The portfolio was also reduced in the second quarter by charge offs of approximately $50 million with approximately $17 million in transfers to other real estate owned.
Reduction in the loan portfolio continues to occur in all four states with the largest dollar decrease of approximately $63 million coming from New Mexico, followed by Utah, Colorado, and Arizona, decreasing approximately $37 million, $28 million and $7 million respectively.
Regarding deposits, we expressed a decrease in total deposits in this quarter, of roughly $41 million, which included a reduction in broker deposits, including CDARS reciprocal CD's of $65 million, again as [NASDAQ] indicated which we cannot roll over due to our capital status.
Our broker deposits in total, have been reduced by $355 million since March 31, 09, and now totaled $93 million. Non-broker deposits increased by $24 million, which included in the increase in CD's gathered on a nationwide basis through deposit listing services, of approximately $77 million. Total deposits listing service CD's outstanding till June 30th were $235 million. While the deposits listing service CD's are not considered to be broker deposits, we recognize they are very rate sensitive, and slightly more expensive than in-market deposits.
Setting aside the activity in broker deposits, and deposits from deposits listing services, deposits were down approximately $53 million. Approximately $13 million of this decrease was from public funds, which we are actively managing down in many cases, due to the 100% pledging requirements.
The majority of the deposit increase shows up New Mexico as New Mexico continues to account for 90% plus of total deposits, subsequent to the sale of the Colorado branches last June, and due to the deposits obtained through the deposits listing service, which are reflected in the New Mexico total.
The majority of the Colorado and Utah deposits remaining are certificate of deposits which continued leave the bank as they mature.
Our non-interest bearing deposits decreased $12 million in the quarter to end at $352 million, but they continue to remain steady and represent approximately 17% of total deposits. The decrease in non-interest bearing deposits were shared by both New Mexico and Arizona. Neither Colorado nor Utah currently have any non-interest bearing deposits as of June 30th.
We are reporting a net loss for the first quarter of $51.8 million or $2.49 per share, driven primarily by the provision for loan losses, which totaled $43 million and other real estate owned expenses of just under $10 million.
While we have worked very hard to reduce and control our non-interest expenses over the last several quarters in light of our severe earnings pressure from loan losses and a compressed net interest margin, we experienced a fairly sharp increase in non-interest expenses in the second quarter. The single largest reason for the increase was related to increase of other real estate owned expenses primarily related to write-downs in value based on new appraisals and/or losses taken to sell properties despite recording the real estate at fair market value on the date of foreclosure.
Midway through this last quarter, we changed our policy to address these other real estate owned expenses at least the write-down and had begun recording foreclosed properties not at fair market value but at liquidation value, recognizing that we are moving to dispose those as quickly as possible, where we feel there is potential for further decline in the value before disposition. We are recognizing that upfront as moved it into other real estate owned.
The increase in the FDIC premiums is a result of higher assessment rate as we drop in capital classification. With the exception of this quarter our expenses other than other real estate owned in FDIC premiums have been on a steady decline quarter-over-quarter for the last year.
In the current quarter other non-interest expenses increased by approximately $900,000 due to legal and consulting expenses related to our capital raising efforts and the trust preferred repurchase offer.
The net interest margin increased slightly in the second quarter to 2.67%, up from 2.56% in the first quarter, primarily due to an overall reduction in the cost of deposits as well as an increase in the net loan yield. We currently anticipate that the net interest margin will continue to increase slightly in the coming months.
As Pat mentioned risk-based capital of the bank has dropped, such that the bank is now considered significantly under-capitalized for regulatory purposes at June 30th and it is likely that the bank will drop to critically under-capitalized by the end of the third quarter, absent raising additional capital.
The current quarter loss has resulted in a negative equity for the holding company and it continues to be under-capitalized for regulatory purposes although there are currently no significant ramifications as a result of this classification since there are no operations at the holding company other than the investment in the bank.
We continue to defer interest on the trust preferred securities and have the ability to do so for another three years. The efficiency ratio increased significantly in the second quarter driven primarily by the increases in OREO expense and FDIC premiums as well as the legal and consulting expenses discussed earlier.
Nonperforming assets decreased by $20 million from the first quarter marking the first decrease in nonperforming assets since the third quarter of 2007. This decrease includes the $17 million decrease in nonperforming loans, a $2 million decrease in other real estate owned and a $1 million decrease in the value of investment securities, which have been placed on non-accrual status.
The decrease in other real estate owned includes approximately $17 million in additions, $11 million in sales and $8 million in write-downs to net realizable value. We expect to continue experiencing sizeable additions to other real estate owned over the next few quarters as nonperforming real estate collateralized loans are resolved through foreclosure and these in lieu of foreclosure.
The $17 million decrease in nonperforming loans was due in large part to significant reduction in the nonperforming loans in the remaining Utah portfolio partially offset by small increases in New Mexico and Colorado. The construction and real estate, one-to-four family categories, which have been responsible for the majority of our loan losses during the last two years, declined as a percentage of the total during the second quarter to 56% and 7% from 62% and 8% respectively for a total reduction of $32 million.
We also saw a slight decrease in our potential problem loans during the quarter from $169 million at March 31, to $163 million at June 30, and although this is a fairly minor reduction, it is the fourth quarter in a row in which potential problem loans have declined from a high of $259 million at June 30, 2009. Potential problem loans are loans still accruing interest but have identified weaknesses and often end up migrating to non-performing status.
The construction portfolio continues to decline, having dropped $80 million in the second quarter, and the $174 million year- to -date, with decreases continuing to be experienced in all four states, including decreases in all categories,. The largest decrease by category in the second quarter, was in one-to-four family lots and lots development, which declined $34 million from March 31st.
Overall the construction portfolio, has decreased by $460 million, since December, 2007, representing a 50% reduction in total construction loans. The overall percentage exposure by type remains relatively unchanged from March 31st.
Delinquencies decreased significantly for the second straight quarter, and while delinquencies are often subject to wide swings, they are at the lowest level they had been in almost two years. The decrease in delinquencies was experienced in all four of markets.
Turning into the allowance, the allowance for loan losses ended the quarter at $124 million a slight decrease of $7 million from March, but it represents 7.05%, of loans held for investment, and 46%, of non performing loans. The allowance at June 30 is comprised of approximately $28 million that we have set aside, for specifically identified losses of $51 million which is based on just on just historical loss rates, and $44 million which is based on subjective factors. This $95 million total of historical loss rate and subjective factors, represent 77% of the total allowance at June 30th.
Net charge-offs for the second quarter totaled $49.8 million with approximately 42% coming from New Mexico; 36% from Utah; 14% Colorado; and 8% Arizona. Charge-offs continue to be related primarily to construction related loans, which represents roughly 60% of total charge-offs in the quarter, down slightly from a high in 2009 of 76%.
Net charge-offs on an annualized basis, based on the second quarter charge-offs is near as 8% of total loans based on the $49.8 million charged-off in the quarter.
The provision for the quarter was $43 million which was up sharply from the first quarter but substantially replenishing the allowance for charge-offs taken during the quarter.
With that, I'll turn it back to Pat for his concluding comments.
Thank you, Chris. This is another very challenging quarter for our company as our capital ratio has declined substantially and we continue to experience challenges with our asset quality. Our focus now is on raising additional capital while maintaining our day-to-day operations, especially continuing to work through our problem asset portfolio.
One important point is that, although our bank's capital level has declined, it is still above the critical levels required by the regulators. We are pleased at this point that there are potential investors interested in our bank and we are continuing discussions with them.
We have a very dedicated management team and employees who are doing a great job of taking good care of our customers during these very challenging times. In the coming weeks and months we will report on whatever progress we have in raising capital.
This concludes our call today. Thank you for listening in.
(Operator Instruction) At this time we show no question.
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