First Security Group, Inc., parent of FSG Bank, "determined that it was appropriate to write off all goodwill from its balance sheet, which negatively affected earnings during the third quarter." Consequently, First Security posted a net loss available to common shareholders of $28.6 million, or $1.84 per diluted share, for the third quarter of 2009.
The after tax goodwill impairment charge totaled $24.8 million and is a one-time, non-cash accounting adjustment that has no effect on cash flows, liquidity, tangible capital or the company's ability to conduct business, officials said.
The charge "is due to the continued economic downturn and its implication on bank valuations. Because goodwill is excluded from regulatory capital, the impairment charge has no impact on the regulatory capital ratios of First Security or FSGBank, both of which remain well capitalized under regulatory requirements," it was stated.
Excluding the impact of the goodwill impairment charge in the third quarter, First Security's net operating loss available to common shareholders was $3.9 million, or $0.25 per diluted share.
The quarterly net operating results were primarily driven by loan loss provision of $9.3 million, as the company bolstered its allowance by conservatively assessing the existing and emerging credit issues related to the national and regional economic slowdown and the corresponding increases in unemployment.
Highlights of the quarter's performance include:
-- Capital: First Security's tangible capital ratio increased to 11.92
percent at September 30, 2009, from 11.84 percent at June 30, 2009, and
well above the threshold for well-capitalized banks. Additionally, First
Security's tangible common equity ratio improved to 9.32 percent as of
September 30, 2009 from 9.26 percent as of June 30, 2009.
-- Allowance for Loan and Lease Losses: First Security's allowance
increased to $25.7 million, or 2.66 percent of loans and leases, as of
September 30, 2009 from $19.3 million, or 1.99 percent, as of June 30,
2009.
-- Net interest margin: First Security's net interest margin increased to
3.96 percent in the third quarter from 3.77 percent in the linked second
quarter due to First Security's ability to reduce its cost of funding
liabilities.
"In light of the uncertain economic environment, we eliminated our intangible goodwill in the third quarter through a non-cash accounting adjustment that does not affect cash or liquidity and has no impact on our regulatory or tangible capital ratios," said Rodger B. Holley, chairman, CEO and president of First Security. "This non-cash charge does not impact our daily operations in any manner. In fact, our quarter-over-quarter underlying operational performance is encouraging. Core earnings, which consists of pre-tax revenue and non-interest expense before the goodwill impairment, improved by $178 thousand to $3.4 million in the third quarter over the linked quarter."
Net interest income increased $400 thousand, or 3.8 percent, to $10.9 million for the third quarter of 2009, compared to $10.5 million for the linked quarter. First Security's net interest margin improved 19 basis points to 3.96 percent in the third quarter from the linked quarter through a combination of reduced dependency on brokered deposits and certificate of deposits repricing at lower, current market rates. For the three and nine months ended Sept. 30, net interest income declined from the comparable 2008 periods due to the Federal Reserve's interest rate reductions.
Non-interest income for the third quarter of 2009 improved by $93 thousand, or 3.5 percent, to $2.7 million over the linked quarter primarily due to an increase in fees and fair value adjustments on mortgages originated and sold in the secondary market. Excluding prior year gains on sales of investment securities, non-interest income decreased $174 thousand from the third quarter of 2008 to the third quarter of 2009 due primarily to lower service charges on bank accounts. On a year-to-date basis, non-interest income declined by $1.2 million, or 13.0 percent, from the 2008 period due mainly to lower service charge fees and mortgage origination fees.
For the third quarter of 2009, total non-interest expense of $37.4 million included a pre-tax, one-time, non-cash, estimated goodwill impairment loss of $27.2 million. First Security is currently conducting its annual goodwill impairment testing, based on the September 30, 2009 evaluation date. The estimate will be finalized upon completion of the goodwill impairment testing, which is currently estimating a full impairment charge. Excluding the goodwill impairment charge, non-interest operating expense was $10.2 million for the third quarter of 2009 compared to $9.9 million for the linked quarter and $9.7 million for the third quarter of 2008. The increase was primarily due to increased professional fees and holding costs on foreclosed properties. On a year-to-date basis, non-interest expense, excluding the goodwill impairment, decreased $473 thousand to $29.6 million in 2009 from $30.0 million in 2008, despite significantly rising FDIC insurance costs, which are beyond First Security's control.
Consistent with First Security's continued focus on controlling costs, a number of categories of noninterest expense in the third quarter of 2009 declined from the linked quarter, including salaries and benefits which decreased by $140 thousand, or 2.8 percent. On a year-to-date basis, salaries and benefits decreased by $1.3 million from 2008 to 2009. The number of full-time equivalent employees declined to 348 as of September 30, 2009, from 365 a year ago and 353 at June 30, 2009.
"While some economists have declared that 'the recession is over,' we anticipate that the lingering effects of the economic downturn will continue to place stress on businesses and borrowers in all markets," noted Mr. Holley. "As such, we aggressively built our loan loss reserve in the third quarter. We believe that this long-term view of our business and market area will help us manage our short-term challenges, and will also better prepare us for the opportunities that will accompany an extended and gradual economic recovery."
Non-performing assets increased modestly in the third quarter of 2009 from the linked quarter. Non-accrual loans and leases increased $4.7 million to $31.5 million at the end of the third quarter of 2009, from the linked quarter; the largest categories were construction and development (C&D) loans with $10.6 million, commercial and industrial (C&I) loans with $8.4 million and commercial leases with $5.1 million. Over the same time period, other real estate owned increased $1.3 million to $14.2 million; and repossessed assets increased $577 thousand to $2.1 million at September 30, 2009, from June 30, 2009. Additional detail on asset quality is available in the supplemental data following financial highlights.
As of Sept. 30, the allowance for loan and lease losses was $25.7 million, or 2.66 percent of total loans, compared to $19.3 million, or 1.99 percent of total loans, as of June 30, 2009. At Sept. 30, approximately 77 percent of the allowance was allocated to loan pools based on common characteristics in accordance with Financial Accounting Standard (FAS) No. 5, whereas the remainder of the allowance was allocated to impaired loans under FAS No. 114.
During the third quarter of 2009, net charge-offs declined to $2.9 million, or 1.18 percent annualized of average loans, compared to $6.9 million, or 2.82 percent annualized, in the linked quarter.
First Security continues its focus on strategically reducing certain balance sheet risks. During the third quarter of 2009, loan balances declined by $4.2 million, or 0.4 percent (1.7 percent annualized). This decline was concentrated in C&D loans of $7.1 million and 1-4 family residential loans of $4.0 million.
First Security's loan portfolio consists of in-market loans originated throughout its branch network. The loan portfolio is well diversified with 29.6 percent in 1-4 family residential, 24.2 percent in commercial real estate, 18.3 percent in C&D and 15.4 percent in C&I. Additional detail on the loan portfolio is available in the supplemental data following financial highlights.
At Sept. 30, total deposits were $1.0 billion, a decline of 1.3 percent (5.3 percent annualized), compared to the end of the linked quarter. The decline was primarily due to an $8.8 million, or 6.8 percent (27.1 percent annualized), decline in brokered certificates of deposit. Core deposits, which include non-interest bearing demand deposit accounts, interest-bearing demand deposit accounts, savings and money markets and certificates of deposit of less than $100 thousand, increased to 60.5 percent of total deposits, from 60.1 percent in the linked quarter. At September 30, 2009, savings and money market accounts totaled $164.5 million, a 24.0 percent increase from one year ago. Total deposits increased $42.8 million, or 4.4 percent from September 30, 2008.
First Security maintains capital levels exceeding those for well-capitalized banks under applicable regulatory guidelines. The tangible equity to tangible assets ratio as of September 30, 2009 was 11.92 percent compared to 11.84 percent at June 30, 2009. Total stockholders' equity at the end of the third quarter of 2009 was $145.2 million, and included common stockholders' equity of $113.9 million and preferred stockholder's equity of $31.2 million.
"The entire financial industry is under pressure to reduce balance sheet risk and increase reserves to sustain recessionary losses," Mr. Holley concluded. "With our diversified loan portfolio, strong capital position and increased reserves, we are preparing for the possibility that credit conditions may deteriorate further in the near future; however, I remain optimistic. While the recovery may be slow and significant improvement may be several quarters away, we operate in a region that has excellent prospects for growth and job expansion. Furthermore, we have a team of experienced and dedicated bankers who continue to have success adding new customer relationships, and we continue focusing on our long term objective of consistent and sustainable core earnings growth."
First Security Group, Inc. is a bank holding company headquartered in Chattanooga, with $1.2 billion in assets. Founded in 1999, First Security's community bank subsidiary, FSGBank, N.A. has 39 full-service banking offices along the interstate corridors of eastern and middle Tennessee and northern Georgia. In Dalton, Georgia, FSGBank operates under the name of Dalton Whitfield Bank; along the Interstate 40 corridor in Tennessee, FSGBank operates under the name of Jackson Bank & Trust. FSGBank provides retail and commercial banking services, trust and investment management, mortgage banking, financial planning, internet banking (www.FSGBank.com) and equipment leasing through its wholly-owned subsidiaries, Kenesaw Leasing and J&S Leasing.