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| FSNM > SEC Filings for FSNM > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Forward-Looking Statements
Certain statements in this Form 10-Q are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based on management's current expectations or predictions of future results or events. We make these forward-looking statements in reliance on the safe harbor provisions provided under the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical fact, included in this Form 10-Q which relate to performance, development or activities that we expect or anticipate will or may happen in the future, are forward looking statements. The discussions regarding our growth strategy, expansion of operations in our markets, acquisitions, dispositions, competition, loan and deposit growth, capital expectations, and response to consolidation in the banking industry include forward-looking statements. Other forward-looking statements may be identified by the use of forward-looking words such as "believe," "expect," "may," "might," "will," "should," "seek," "could," "approximately," "intend," "plan," "estimate," or "anticipate" or the negative of those words or other similar expressions.
Forward-looking statements involve inherent risks and uncertainties and are based on numerous assumptions. They are not guarantees of future performance. A number of important factors could cause actual results to differ materially from those in the forward-looking statement. Some factors include changes in interest rates, local business conditions, government regulations, loss of key personnel or inability to hire suitable personnel, asset quality and loan loss trends, faster or slower than anticipated growth, economic conditions, our competitors' responses to our marketing strategy or new competitive conditions, and competition in the geographic and business areas in which we conduct our operations. Forward-looking statements contained herein are made only as of the date made, and we do not undertake any obligation to update them to reflect events or circumstances after the date of this report to reflect the occurrence of unanticipated events.
Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. These factors are included in our Form 10-K for the year ended December 31, 2008, and updated in our Form 10-Q for the period ended June 30, 2009, as filed with the Securities and Exchange Commission. We have also included our revised risk factors that are relevant for the current period.
Consolidated Condensed Balance Sheets
Our total assets decreased by $528.7 million from $3.415 billion as of December 31, 2008, to $2.886 billion as of September 30, 2009. The decrease in total assets is primarily due to the branch sale of approximately $387 million in loans and $20 million in premises and equipment. In addition, in September 2009, we surrendered approximately $36 million of bank-owned life insurance for liquidity and risk-based capital purposes. These decreases were partially offset
by an increase in available for sale securities of $102.2 million. Our deposits decreased by $370.9 million from $2.523 billion at December 31, 2008, to $2.152 billion at September 30, 2009. The decrease in deposits is primarily due to the branch sale of approximately $512 million in deposits and a reduction in brokered deposits of $128 million, offset by an increase in our non-brokered deposits of $269 million.
The following table presents the amounts of our loans, by category, at the dates indicated:
September 30, 2009 December 31, 2008 September 30, 2008
Amount % Amount % Amount %
(Dollars in thousands)
Commercial $ 263,918 12.4 % $ 356,769 13.0 % $ 352,579 12.8 %
Real estate-commercial 893,463 42.1 % 1,172,952 42.6 % 1,117,029 40.4 %
Real estate-one- to four-family 203,749 9.6 % 270,613 9.8 % 283,262 10.3 %
Real estate-construction 725,707 34.1 % 896,117 32.5 % 950,238 34.4 %
Consumer and other 30,430 1.4 % 41,474 1.5 % 43,048 1.6 %
Mortgage loans available for sale 8,525 0.4 % 16,664 0.6 % 14,981 0.5 %
Total $ 2,125,792 100.0 % $ 2,754,589 100.0 % $ 2,761,137 100.0 %
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The following table represents customer deposits, by category, at the dates indicated:
September 30, 2009 December 31, 2008 September 30, 2008
Amount % Amount % Amount %
(Dollars in thousands)
Non-interest-bearing $ 389,672 18.1 % $ 453,319 18.0 % $ 476,094 19.1 %
Interest-bearing demand 336,950 15.7 % 296,732 11.8 % 296,955 11.9 %
Money market savings accounts 390,288 18.1 % 471,011 18.6 % 535,075 21.4 %
Regular savings 90,008 4.2 % 100,691 4.0 % 102,685 4.1 %
Certificates of deposit less than
$100,000 237,932 11.1 % 325,110 12.9 % 346,010 13.9 %
Certificates of deposit greater than
$100,000 430,758 20.0 % 471,826 18.7 % 522,929 20.9 %
CDARS Reciprocal deposits 97,271 4.5 % 212,249 8.4 % 155,143 6.2 %
Brokered deposits 178,804 8.3 % 191,604 7.6 % 62,390 2.5 %
Total $ 2,151,683 100.0 % $ 2,522,542 100.0 % $ 2,497,281 100.0 %
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Consolidated Results of Operations
Our net loss for the three months ended September 30, 2009 was $51.5 million or $(2.49) per diluted share, compared to a net loss of $1.8 million or $(0.09) per diluted share for the same period in 2008. First State's net loss for the nine months ended September 30, 2009 was $82.1 million, or $(3.99) per diluted share, compared to a net loss of $116.2 million, or $(5.76) per diluted share for the same period in 2008. The net loss for the three and nine months ended September 30, 2009 resulted primarily from the significant provision for loan losses due to the level of non-performing assets and increased charge-offs, mitigated by the gain on the sale of our Colorado branches of $23.3 million in June 2009. The results for the three and nine months ended September 30, 2008 were negatively impacted by a $127.4 million non-cash goodwill impairment charge that occurred in the second quarter of 2008 as well as provisioning for loan losses due primarily to increasing levels of non-performing assets.
First State has disclosed in this Form 10-Q certain non-GAAP financial measures to provide meaningful supplemental information regarding First State's operational performance and to enhance investors' overall understanding of First State's operating financial performance. Management believes that these non-GAAP financial measures allow for additional transparency and are used by some investors, analysts, and other users of First State's financial information as performance measures. These non-GAAP financial measures are presented for supplemental informational purposes only for understanding First State's operating results and should not be considered a substitute for financial information presented in accordance with GAAP. These non-GAAP financial measures presented by First State may be different from non-GAAP financial measures used by other companies. The table below presents performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements.
FINANCIAL SUMMARY:
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited - $ in thousands except
per-share amounts) 2009 2008 2009 2008
Net loss as reported $ (51,540 ) $ (1,778 ) $ (82,139 ) $ (116,160 )
Goodwill impairment charge, net of tax - - - 107,290
Gain on sale of Colorado branches - - (23,292 ) -
Net loss excluding goodwill impairment
charge and gain on sale of Colorado
branches $ (51,540 ) $ (1,778 ) $ (105,431 ) $ (8,870 )
GAAP basic and diluted loss per share $ (2.49 ) $ (0.09 ) $ (3.99 ) $ (5.76 )
Diluted loss per share excluding goodwill
impairment charge and gain on sale of
Colorado branches $ (2.49 ) $ (0.09 ) $ (5.12 ) $ (0.44 )
GAAP return on average assets (6.92 )% (0.20 )% (3.33 )% (4.48 )%
Return on average assets excluding
goodwill impairment charge and gain on
sale of Colorado branches (6.92 )% (0.20 )% (4.27 )% (0.34 )%
GAAP return on average equity (169.44 )% (3.63 )% (80.48 )% (56.13 )%
Return on average equity excluding
goodwill impairment charge and gain on
sale of Colorado branches (169.44 )% (3.63 )% (103.30 )% (4.29 )%
Non-interest income as reported $ 9,726 $ 6,370 $ 49,428 $ 19,569
Gain on sale of Colorado branches - - (23,292 ) -
Non-interest income excluding gain on
sale of Colorado branches $ 9,726 $ 6,370 $ 26,136 $ 19,569
Non-interest expense as reported $ 26,540 $ 27,260 $ 83,711 $ 210,155
Goodwill impairment charge - - - (127,365 )
Non-interest expense excluding goodwill
impairment charge $ 26,540 $ 27,260 $ 83,711 $ 82,790
Efficiency ratio * 94.63 % 71.68 % 70.33 % 184.54 %
Efficiency ratio excluding goodwill
impairment charge and gain on sale of
Colorado branches 94.63 % 71.68 % 87.45 % 72.70 %
GAAP operating expenses to average assets 3.57 % 3.12 % 3.39 % 8.11 %
Operating expenses to average assets
excluding goodwill impairment charge and
gain on sale of Colorado branches 3.57 % 3.12 % 3.39 % 3.19 %
Net interest margin 2.53 % 3.87 % 2.93 % 3.98 %
Average equity to average assets 4.09 % 5.61 % 4.13 % 7.98 %
Leverage ratio:
Consolidated 3.18 % 7.12 % 3.18 % 7.12 %
Bank Subsidiary 5.75 % 8.02 % 5.75 % 8.02 %
Total risk based capital ratio:
Consolidated 8.75 % 10.44 % 8.75 % 10.44 %
Bank Subsidiary 9.21 % 10.45 % 9.21 % 10.45 %
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* (Efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.)
The net loss excluding the gain on sale of Colorado branches for the nine months ended September 30, 2009, was $105.4 million compared to a net loss excluding goodwill impairment charge of $8.9 million for 2008. The net operating loss per diluted share excluding the gain on sale of Colorado branches for the nine months ended June 30, 2009 was $(5.12) compared to a net loss per diluted share excluding goodwill impairment charge of $(0.44) for the same period in 2008.
Our net interest income decreased $13.4 million to $18.3 million for the three months ended September 30, 2009 compared to $31.7 million for the same period in 2008. This decrease was composed of a $19.2 million decrease in total interest income, partially offset by a $5.9 million decrease in total interest expense. Our net interest margin was 2.53% and 3.87% for the third quarter of 2009 and 2008, respectively, and 2.96% for the second quarter of 2009. The net interest margin was 2.93% and 3.98% for the nine months ended September 30, 2009 and 2008, respectively.
The decrease in total interest income for the three months ended September 30, 2009 was composed of a decrease of $11.7 million due to a 1.86% decrease in the yield on average interest-earning assets, and a decrease of $7.5 million due to a decrease in average interest earning assets of $387.1 million. The decrease in average earning assets occurred primarily in loans, primarily due to the Colorado branch sale on June 26, 2009, and the run-off of other loans, partially offset by an increase in interest-bearing deposits with other banks. In addition, during the quarter ended September 30, 2009, we reversed approximately $1.5 million in accrued interest on two Colorado metropolitan municipal district bonds. The bond agreements allow the districts to defer interest payments in the case where available funds from development of the district are not sufficient to cover the debt service. Due to the status of the developments and related uncertainty of the cash flows, we reversed the accrued interest on these bonds.
The decrease in total interest expense for the three months ended September 30, 2009 was composed of a decrease of $4.2 million due to a 0.61% decrease in the cost of interest-bearing liabilities, and a decrease of $1.7 million due to an increase in average interest-bearing liabilities of $353.5 million. The decrease in average interest-bearing liabilities was primarily due to a decrease in average interest-bearing deposits of $279.0 million, due to the Colorado branch sale that occurred on June 26, 2009, partially offset by increases in interest bearing deposits in our existing markets. Average short-term debt and securities sold under agreements to repurchase decreased by $234.1 million and $117.7 million, respectively, offset by an increase in average long-term borrowings of $277.5 million.
Our net interest income decreased $24.7 million to $69.6 million for the nine months ended September 30, 2009 compared to $94.3 million for the same period in 2008. This decrease was composed of a $40.5 million decrease in total interest income, partially offset by a $15.8 million decrease in total interest expense.
The decrease in total interest income for the nine months ended September 30, 2009 was composed of a decrease of $37.4 million due to a 1.71% decrease in the yield on average interest-earning assets, and a decrease of $3.1 million primarily due to the reversal of approximately $1.5 million in accrued interest on two Colorado metropolitan municipal district bonds. Average interest earning assets were $3.172 million at September 30, 2009, compared to $3.166 million at September 30, 2008. Average loans decreased by $126.6 million, but were offset by the increase in average interest-bearing deposits with other banks.
The decrease in total interest expense for the nine months ended September 30, 2009 was composed of a decrease of $19.3 million due to a 0.79% decrease in the cost of interest-bearing liabilities, partially offset by an increase of $3.5 million on flat average interest-bearing liabilities. Average interest bearing deposits decreased by $47.5 million, average securities sold under agreements to repurchase decreased by $108.2 million, and average short term borrowings decreased by $80.5 million. These decreases were offset by an increase in average long term debt of $236.3 million.
The decrease in the net interest margin is primarily due to the decrease in the federal funds target rate that began in September 2007 and continued through December 2008, along with the increase in non-performing assets throughout 2008 and the first three quarters of 2009. The Federal Reserve Bank has lowered the federal funds target rate by 500 basis points, 400 of which occurred in calendar 2008, leading to an equal decrease in the prime lending rate. Approximately 70% of loans held for investment is tied directly to the prime lending rate and adjusts daily when there is a change in the prime lending rate. Approximately 35% of loans that are tied directly to the prime lending rate have an interest rate floor. The rates paid on customer deposits are influenced more by competition in our markets and tend to lag behind Federal Reserve Bank action in both timing and magnitude, particularly in this very low rate environment. Although we have lowered selected deposit rates since the beginning of 2008, we continue to remain competitive in the markets we serve.
In addition, during the quarter ended September 30, 2009, we reversed approximately $1.5 million in accrued interest on two Colorado metropolitan municipal district bonds. Although the bond agreements allow the districts to defer interest payments, which they have elected to do, we considered it appropriate to reverse the accrued interest as we moved these bonds to non accrual status at the end of the quarter.
Our asset sensitivity including the increase in excess cash, the decrease in the prime lending rate, and the increase in non-accrual loans combined with an increase in borrowings and minimal deposit repricing continues to have a negative impact on the net interest margin.
In the first quarter of 2009, in order to increase our liquidity position, we issued additional brokered deposits and borrowed additional funds from the Federal Home Loan Bank ("FHLB"), resulting in an increase in lower yielding cash on the balance sheet. This strategy increased our cash liquidity and at the same time has resulted in further margin compression by increasing our earning asset base with lower yielding assets and contributing to an increase in interest expense. As part of our strategy, we focused on maturities of 15 to 24 months for brokered deposits issued in the first quarter of 2009, as well as maturities over the next two to three years for FHLB borrowings to further strengthen our liquidity position. Although these activities as noted above have contributed to the recent margin compression, we continue to believe that the improvement in our current liquidity position in the current banking environment outweighs the margin compression we have seen over the last few quarters.
The increase in non accrual loans has continued to put pressure on our net interest margin. The margin compression is a direct result of reversals of accrued interest on loans moving to non accrual status during the period as well as the inability to accrue interest on the respective loan going forward ultimately resulting in an earning asset with a zero percent rate. The level of non accrual loans has increased to $229 million at the end of September 2009 from $99 million at the end of September 2008. Non accrual loans now make up 8% of interest earning assets compared to 3% a year ago.
The extent of future changes in our net interest margin will depend on the amount and timing of any Federal Reserve rate changes, our overall liquidity position, our non-performing asset levels, our ability to manage the cost of interest-bearing liabilities, and our ability to stay competitive in the markets we serve.
Given current economic conditions and trends, we may continue to experience asset quality deterioration and higher levels of non-performing loans in the near-term, as well as continued compression in our net interest margin, which would result in continued negative earnings and financial condition pressures.
Non-interest Income and Non-interest Expense
An analysis of the components of non-interest income for the three months ended
September 30, 2009 and 2008 is presented in the table below.
Non-interest income Three Months Ended
(Dollars in thousands) September 30,
2009 2008 $ Change % Change
Service charges $ 3,157 $ 3,969 $ (812 ) (20 )%
Credit and debit card transaction fees 871 1,037 (166 ) (16 )
Gain (loss) on sale or call of investment
securities 4,209 (556 ) 4,765 (857 )
Gain on sale of loans 665 840 (175 ) (21 )
Other 824 1,080 (256 ) (24 )
$ 9,726 $ 6,370 $ 3,356 53 %
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The decrease in service charges and credit and debit card transaction fees is primarily due to the completion of the sale of our Colorado branches on June 26, 2009.
The increase in gain on investment securities is due to an increase in sales of investment securities during the period. Certain securities were sold at a gain as part of our continued efforts to bolster capital by repositioning U.S. Agency securities into GNMA securities which are guaranteed by the U.S. government and therefore have a lower risk weighting for capital purposes. The 2008 loss on investment securities includes an other-than-temporary impairment charge of $565,000 on FHLMC preferred stock acquired as part of the acquisition of Front Range Capital Corporation in March 2007, partially offset by gains from calls and sales of securities during the period.
The decrease in gain on sale of residential mortgage loans is primarily due to decreased volumes. During the third quarter of 2009 we sold approximately $46 million in loans compared to approximately $56 million during the same period in 2008. The decline in volume is due primarily to the closure of our Colorado mortgage operations in conjunction with the Colorado branch sale.
The decrease in other non-interest income is primarily due to a decrease in rental income, related to the sale of our Colorado branches and a decrease in bank owned life insurance income. In September 2009, we surrendered bank-owned life insurance policies with a current value of approximately $36 million for liquidity and risk-based capital purposes. The surrenders resulted in a tax penalty of approximately $896,000 which is included in other non-interest expense.
An analysis of the components of non-interest expense for the three months ended September 30, 2009 and 2008 is presented in the table below.
Non-interest expense Three Months Ended
(Dollars in thousands) September 30,
2009 2008 $ Change % Change
Salaries and employee benefits $ 9,067 $ 12,468 $ (3,401 ) (27 )%
Occupancy 3,285 4,360 (1,075 ) (25 )
Data processing 1,340 1,341 (1 ) -
Equipment 1,324 1,915 (591 ) (31 )
Legal, accounting, and consulting 2,489 590 1,899 322
Marketing 613 1,057 (444 ) (42 )
Telephone 426 479 (53 ) (11 )
Other real estate owned 2,143 627 1,516 242
FDIC insurance premiums 1,843 554 1,289 233
Penalties and interest 897 1 896 896
Amortization of intangibles 272 640 (368 ) (58 )
Other 2,841 3,228 (387 ) (12 )
$ 26,540 $ 27,260 $ (720 ) (3 )%
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The decrease in salaries and employee benefits is primarily due to a decrease in headcount. At September 30, 2009, full time equivalent employees totaled 559 compared to 860 at September 30, 2008. The sale of the Colorado branches and the related closure of the Colorado mortgage division accounted for a headcount reduction of 193. The decrease is also due to a decrease in self-insured medical and dental claims.
The decrease in occupancy is primarily due to a decrease in building depreciation expense, leasehold amortization, and rent and related expenses due to the sale of the Colorado branches and the Colorado Mortgage division closure, partially offset by higher lease impairment charges on vacated office space in the third quarter of 2009 compared to 2008.
The decrease in equipment is primarily due to the decrease in depreciation expense on equipment and a decrease in equipment rental and associated costs due to the sale of the Colorado branches and Colorado Mortgage division closure.
The increase in legal, accounting, and consulting expense resulted partially higher legal fees as a result of our written agreement with the regulators and higher levels of non-performing loans. In addition, we incurred approximately $1.5 million in consulting fees related to a staffing model and various revenue enhancement models that were prepared in connection with our continued efforts to control non-interest expenses and increase other non-interest income.
The decrease in marketing expenses is primarily due to a decrease in direct advertising costs. Marketing costs were higher in the 2008 period due to the Bank's new ad campaign combined with costs associated with the introduction of the Bank's new deposit products.
The increase in expenses for other real estate owned is primarily due to an increase in write-downs of properties to reflect further deterioration of fair values subsequent to foreclosure and an increase in other expenses related to the properties, both commensurate with the increase in number of properties.
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